ILLMAS Posted October 4, 2011 Report Share Posted October 4, 2011 I need to setup a building (fixed asset) that has been partially completed and placed in service in 2010, and want to see if this would be the correct way of setting up in ATX. Scenario Land Cost $100K Construction Cost $800K and more needed to complete the 2nd floor Since I know what the land cost, I am allocating $100K for the cost of land, non-depreciation, now for the 1st floor, the TP believes that about 65% of the construction cost should be allocated toward the 1st floor. So I would capitalize $520K and depreciate over 39yrs since it's commercial space. Would it be ideal to leave out the 2nd floor information for ATX until it's finished and placed in service? Lets call this part II So we know the TP paid $100K for the land, $800K so far in construction and he also bought a house which he is renting, to eventualy knock down and to build a parking lot for the commercial and residential units once everything is completed. Land 100K Construction 800K Rear house 200K Total 1.1M TP then sells part of the investment for 300K to a relative (Beneficial Interest), for example, he now owns about 73% and the relative owns about 27%, my question is how would I account for this sale in ATX? The rear house already appears on Sch E as a rental property since it has been rented for the last 8 yrs, would it make sense just to post the sale towards the completed part of the project, for example, just take 300K out of the 1st floor against the sales price of 300K which would be a wash??? Any advice would greatly be appreciated. Thanks MAS Quote Link to comment Share on other sites More sharing options...
jainen Posted October 4, 2011 Report Share Posted October 4, 2011 >>just take 300K out of the 1st floor against the sales price of 300K<< Assuming the transaction was at fair market value (which can't be assumed when the owner claims no change in real estate values over eight years), and that the sales agreement did not allocate the $300,000 to any separate asset, no. The land, rental, and second floor all get counted too. For example, since the first floor is only 48% of the total value, only $144,000 goes to it. You must calculate gain/loss on the 27% interest in each asset, and reduce basis accordingly. I would guess there is about $10,000 in capital gain on the rental, since its basis has already been reduced 1/5 by depreciation. Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted October 4, 2011 Author Report Share Posted October 4, 2011 Thanks Jainen, you have directed me in the right direction, I am going to create a spreadsheet to further analysis it. You brought up some good points that I need to address the TP. MAS Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted October 5, 2011 Author Report Share Posted October 5, 2011 Question for Jainen, ok verified with TP and no FMV was used, sale price was based on actual cost which was around 900K at the time of the sale (sales price 300K or 1/3), the rear house/land was excluded which makes things easier now. Now for example, the relative is now 1/3 owner of the land, 1/3 owner of the 1st fl and 1/3 of the 2nd, and as more money is put in to finish up the 2nd fl., 1/3 or 33% will decrease because the relative is not going to be putting any more money in, only the TP. Also, since actual cost was being used and the land, construction in progress was not being depreciated, then there was no gain? The sale happened a couple of months before the 1st was put in service. Now the relative would have to show on their tax return 1/3 of non depre. land and 1/3 of the 1st fl? TP and relative won't show the 2nd fl until it's placed in service correct? There is were I am a bit confused, since the 2nd floor is not finished yet, how do I account for both if it hasn't been put in service? Thanks Quote Link to comment Share on other sites More sharing options...
jainen Posted October 5, 2011 Report Share Posted October 5, 2011 >>as more money is put in to finish up the 2nd fl., 1/3 or 33% will decrease<< That's not a normal ownership pattern for real estate. What does the DEED say? You may have to think of this as a partnership developing the property. Or perhaps the relative has and will retain 1/3 equity in the existing property with improvements, but no equity in any later improvements forming a separate asset in the manner of the rental house. This situation has too many technicalities for you to accept or even understand the client's description. You must read the actual contract of sale and deed. Any terms that are not explicitly spelled out can not be applied for any purpose. The law in every state requires a written contract for the sale of real estate. Meanwhile, you still need to determine FMV to calculate gain or loss on whatever fee or partial rights were legally transferred. Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted October 5, 2011 Author Report Share Posted October 5, 2011 Again thank you. MAS Quote Link to comment Share on other sites More sharing options...
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