Tax Treatment of Lease Transaction and Underlying Expenses

[equinecpa]

I have a client who is selling floating homes. These homes are built on an elaborate pier upon which the house is placed. The house itself is a unit that is purchased and placed on the pier. Due to the lake being owned by the corp of engineers, the houses are "sold" via a 99 year lease.

I'm thinking correct treatment of this transaction is a sale when the lease transaction occurs and then expense the purchased unit at that time.

My question is should this be treated like a housing development with the pier,road, sewer, electric all being treated as common costs allocated between the # of units they serve, and then expensed as sales take place? Or is the correct treatment treating the dock, sewer, and electric as assets (land improvements?) and depreciating them. Would a 15 year class life be appropriate for these costs? 27.5 years perhaps for the pier?

Carolyn

[ATSMAN]

Is your client in the business of developing these type of properties or was it a one time venture?

I had a client who was an attorney by profession buy a large tract of land near a lake and subdivide into 5 lots to build vacation homes. He also put in septic system and developed the access road and path to the docks. Since this was a one time venture, we allocated the development cost to each lot based on area and then it became the basis of that lot. When the lot was sold with home the CG was calculated based on that.

[equinecpa]

He owns a resort on which he's adding these homes to expand his offerings. He plans to put in several piers so I'd say he's in the business.

[Burke]

Is your client in the business of developing these type of properties or was it a one time venture?

I had a client who was an attorney by profession buy a large tract of land near a lake and subdivide into 5 lots to build vacation homes. He also put in septic system and developed the access road and path to the docks. Since this was a one time venture, we allocated the development cost to each lot based on area and then it became the basis of that lot. When the lot was sold with home the CG was calculated based on that.

Whether it is a one-time venture or not, the minute you subdivide a lot and improve them, you become a dealer and there is no cap gains. Just ord income, with the expenses of purchase and improvement divided among the lots, and expensed as each is sold. (There is an exception for land held more than 5 yrs which is not inherited and no substantial improvements made.) See IRC 1237. In the present case, I agree with OP -- he's in the business. No depreciation of thise costs.