houses/condos as inventory

[cashjunkie]

i have read the capitalization rules 263A, but these rules specify inventory that is
"produced, built, developed...". i am still not certain what acquisiton and carrying costs can be expensed and which must be capitalized. specifically..real estate taxes paid at settlement and interest paid at settlement. as well as subsequent mortgage interest paid and subsequent property taxes paid while holding until resale. client buys and sells thru an s corp but i do not think that matters. also, holding period will average one yr (give or take). thanks for any input.

[Joe Btfsplk]

Is this a contstruction job?

If this is a construction job, then I would recommend use of the Completed Contract method of accounting if average sales are under $10 million. Otherwise the percentage of completion method should be used.

If it is a house-flipping fixer-upper project, then I would call it inventory.

In either case all costs would be an inventory or construction-in-progress cost and deducted at the time the related income is recognized.

[jerome]

If it is a home construction contractor, UNICAP might not apply. The tax book page 8-14 lists home construction contractors that complete construction within two years and have annual gross receipts of $10 million or less as an exception to the UNICAP rules.

If UNICAP does not apply, then I would not add real estate taxes and mortgage interest to inventory. Those are indirect costs that can be expensed, unless UNICAP applies, or unless the taxpayer elects to add them to basis under regulation section 1.266-1.

[Davc]

According to the poster, the TP is not a contractor. He owns the property. If he is building the condos, then all interest and taxes are capitalized during the construction period. The rules for "self constructed assets" are basically the unicap rules but don't have the exceptions

[cashjunkie]

houses/inventory clarification

sorry...i should have been clearer...client buys already constructed houses/condos...holds them for however long(average 1 yr) then resells them. can interst and taxes paid at settlement and subsequent mortgage interest/taxes be deducted as expenses or should i add them to the cost basis.??thanks again for input.