Interest Expense

[RLymanC]

Borrowed money used to purchase lot to build a spec house on. Does interest on the loan go on form 4952 as investment expense, and offsets other investment income??

[Harvey Lucas]

It is Job Costed

I have a client who is a spec home builder.

Interest expense is all part of job cost and is added to cost basis at least untill home is "finished".

When the home sells, you add up all the costs, compare to sales price and you have profit or loss.

My client is a c corp, so of course any profit is regular old business income.

A sole prop would handle it same way..ie..profit is schedule c..

When you say "Spec Home" I automatically assume you are referring to someone who is in the business of building and selling homes.

However, if it is going to be the clients main home that he is going to live in then I think it is diferent..in that case, I believe you still capitalize the interest untill he moves in. After he moves in you can begin deducting it.

Even if he is "an Investor", not in the business of building and selling homes, but is building and planing to sell this one home only as investment property..even then I believe interest is capitalized until it is "finished"...then if it sat vacant for a long time before it sold, that particular portion of interest would be considered Inv Int Exp...

HarveyLucas

[Bees Knees]

I agree with Harvey, except that if you purchase a lot to build your own personal residence, none of the interest is deductible prior to the start of construction. It is considered personal interest. See TTB, page 4-13, first column example.

[RLymanC]

Interest Exp. on spec house

Thank you both for your response:

What if the lot sits vacant for 2 years....my quess is all the interest expense would be investment expense. Am I guessing right????

[Bees Knees]

If it is a business, and the taxpayer is in the business of building spec homes, and the completion of the project takes more than years, then the interest must be capitalized under the UNICAP rules. It isn't deductible until the spec home is eventually sold.

See TTB, pages 8-14 and 8-15.

[Gretel]

Bringing up this old post with an additional question.

Taxpayers buys land to build rental property. Interest on land paid in 2006 and 2007. In 2007 rental property was built and finished in 2008. Is the interest paid before the construction considered part of the land or part of the building?

In other words, are the land costs only what was actually paid for the land or do I need to allocate some interest/closing costs paid to the land as well?

[Gretel]

Moving it back on top just in case if someone who cannot sleep has a good idea.

[BHoffman]

Sleepless in the SW

If there's an obvious trace for the interest paid for the land separate from that of the building, then I vote you should allocate it.

But take that with a grain of salt because I'm higher than a kite on caffeine

[Gretel]

Thanks, B. Hoffman. Hope you still got somewhat of a good rest.

I am still mulling over this. Also over the question of intent. If the land was purchased with the intent to build a rental wouldn't that make the interest on the land paid, before the construction loan was in place, construction interest and therefor then allocated to the building?