Should predevelopment costs be capitalized?

[Maria]

What kind of costs should be capitalized?

[Bees Knees]

That’s a big question. It depends.

If the taxpayer is subject to Uniform Capitalization Rules (TTB page 8-14), then predevelopment costs would be capitalized.

If the taxpayer elects under Section 1.266-1(b) to capitalize interest and taxes, then the costs are capitalized (TTB page 4-14).

If the taxpayer is in the business of purchasing, developing, and then selling real property, the predevelopment costs would be considered inventory and capitalized as such.

If the taxpayer has not started the business of developing real property, such costs would be considered start up costs and capitalized or expensed under the start up cost amortization rules.

It depends on the situation. I think in most cases, if you are talking the commercial development of real estate, you would capitalize all pre-development costs under one of the above.

[Maria]

Thanks

It is the expenses incurred before the construction starts. What needs to be capitalized and what needs to be amortized.

There are only 6 kinds of expenses:

Appraisal fees

Consultant fees

Legal fees

Enviromental fees

Government fees

Closing costs