Real Estate Investor

[jrjames]

I have a real estate agent who also invests in real estate. She is a general partner with two other partners and has invested in three pieces of raw land. For the last two years the partnership return has been prepared showing a partnership loss because of interest and other expenses such as office supplies.

Question 1: If this is an investment company should not the interest expense be reported on th 3rd page of the partnership return and therefore carried forward to the partners as investment interest only to be dedcuted when the partner has investment income. Likewise the other investment expenses(office supplies etc.) shouldn't they be carried to the partners schedule A. She has sold an unrelated piece of raw land this year that she held for more than one year. If I amended the partnership returns could I not use her portion of the investment interest for the past two years on the partnership return as an offset for the investment caital gain on this other land sale?

She also has puchased other raw land for investment but has placed a manufactured home on two of the lots and done landscaping and utilities hookup but has not sold these houses in two years. During that time she has reported a loss on schedule C for the manufactured homes from expenses such as maintenance, supplies. licenses, taxes etc. She has not reported any interest expense nor the landscape or utility hookup expenses. She expects to claim long term capital gain on these homes when sold and add the interest and lot improvement costs to the basis of the home

Question 2: Isn't she mixing parts of the tax law concerning dealer and investor to suite her own purpose. She seems to be reporting as a dealer by using Schedule C, but is not reporting interest. It is my understanding that a dealer should report interest after the production period as a current expense. It seems to me it would be more simple to keep her reporting as a dealer for the manufactured homes but amend the returns to report the interest and capitalize the lot improvement costs.

Of course this would not allow capital gain treatment if sold. She is thinking about coverting them to rental property if they don't sell soon. Would this solve our problem concering capital gain treatment if she keeps them as rental property for more than a year?

I know these are long questions but any thoughts or suggestions would be appreciated.