Here's a fun one - not! (basis, acquisition)

[Catherine]

This one is a doozy, and this client's taxes will probably be filed late as there are too many complications with this and other issues to have it all properly done by Thursday.

 

Client is buying two condos for the purpose of renting them out.  However.  (1) They are not yet built (but are being built), (2) they are in Dubai, and (3) since he is not a citizen of Dubai he can't get a mortgage, so (4) he is paying in cash, in chunks, as milestones are reached.

 

How on God's green earth do I treat these acquisition costs for US tax purposes?  Are any of them even worth considering until the units are completed?  

 

As far as I can tell, none of them are start up costs, as they aren't for market research or utilities or advertising or any of the standard categories.  (Will have to look at insurance; it's possible he is carrying some but the construction company's coverage likely covers in-process construction.)

 

Eep.  Any/all help greatly appreciated!

[jklcpa]

Well, since he's paying in cash, at least you avoid capitalized interest. The basis calcs might not be that hard if your client has a contract with the builder for a set price. There can be modifications to it as work progresses, so ask if any changes to the original contract have been made.  As you say, the price is being paid in installments as the project is completed, so maybe all you have to do is add up the payments to make sure it is in line with the final price.  Are there other expenses being paid on the property other than payments toward the construction?  Is your complication that this a large enough project that you are considering cost segregation of the building's components?

[jklcpa]

The other thing that popped into my head is the holding period of constructed assets, but unless a unit is sold within one year after completion, you won't have any complication of trying to break down a possible sale transaction into its short- and long-term components. 

[Gail in Virginia]

Maybe I am missing something, but if they are rental units the basis will be depreciated beginning when the assets are placed in service, right?  Does having them out of the country complicate this?  So unless you are doing cost segregation, this seems pretty straight forward compared to some things.  Or like I said, I missed something.  This has been a heckuva October.

[BulldogTom]

I am with Gail on this.  I don't see any of it being deductible this year.  It is all capital transactions so far, and when the property is ready to be used to generate income, the cost will begin depreciating.

Are you overthinking this one Catherine, or are Gail and I missing some important point?

Tom
Newark, CA

[Abby Normal]

Not in service. Don't worry about these assets until they are on the market to be rented. #fagettaboutit

[Catherine]

You all basically went through everything I was thinking of -- but I had thought myself into confused circles.  Basis, not deductible but depreciable after placed in service - unless there is some small non-acquisition amount that could be considered a current year expense.  Fortunately the paperwork from Dubai is in English.  Am leaving pawing through those for last...