Building a home - business or personal

[imjulier]

I'm just starting to talk to a client about a situation they have and don't have all the relevant information yet but want to get some ideas from those of you on this board. Here's what I know.

-Land purchased in 2006 and "development" of land began

-"substantial" amounts (don't know what substantial is yet but I believe around $30K-40K) were spent to improve the land like sewer, water, electric, foundation, etc.

-problems with entire development (client only owned their parcel of land) caused development to cease and legal action to begin

-result of legal action is tearing out of foundation and re-starting on the building

At the time, client was building to live in as main home. Since all the problems, client had to find another main home and now has a 2nd piece of property they are developing. Client paid a significant amount of taxes in 2006 and was told by another CPA that they can deduct all the expenses related to the development of the first piece of property which were costs incurred in 2006. I'm trying to figure out how to do this and only have 1 idea, which doesn't affect 2006 taxes:

-Property now will in all likelihood become a rental. This makes the cost of the land and cost to develop and build a capitalizable cost (the basis to be depreciated over 27.5 years) which won't occur until the rental is ready....probably 2010.

Is there something I'm not seeing or thinking about to use the costs in 2006?

Thanks for any thoughts.

Julie

[Jake]

Depending on the circumstances maybe a casualty or theft loss in 2006. Or if the other CPA determined that your client was in the devolpment business then perhaps there could be a deductible loss for 2006. But I am with you it sounds like the expenses probably should be capitalized and added to the basis of the property.

[jainen]

>>This makes the cost of the land and cost to develop and build a capitalizable cost<<

Land and development costs must ALWAYS be capitalized. If and when the rental is placed in service, depreciation can be started. Otherwise the cost will be recoverable when sold.

Don't know what the issues were, but no casualty loss for needing more development. It's not sudden or unexpected or unusual. Somebody just wasn't following the rules.

By the way, I don't believe your client was actually told what he claims, at least not by any reliable source. He probably didn't ask the right question. For example, if he said, "I lost all this money trying to develop the land," well, sure, a LOSS would be deductible in 2006. But in tax lingo he didn't actually lose anything, he just spent it. And even though it's costing a whole lot more than he originally expected, he still has the capital asset that he spent it on.

[OldJack]

>>Depending on the circumstances <<

The facts may be clear to you but not to members of this board, or at least not to me. Who owned the land and who spent the money to develop structures that were later destroyed? If your client spent money to develop land that was not legally his that makes a difference. If the facts are that he bought the land to build later may be irrelevant.