Investment Interest

[Acownt4it]

Client is building a new commercial building in 2006-2007. They had construction loans on the new building with interest being paid periodically.
Prior accountant put the interest they paid on Form 4952 Investment Interest Expense. The amount being carried over to 2007 is $86,629.
The building is completed in 2007 and they are renting out the units.
How do I move that interstest previously paid and carried over to 2007 onto the new building's Schedule E?

[Snaggletooth]

You Don't

Hate to the bearer of bad tidings but the interest during period of construction must be capitalized into the unadjusted basis of the building.

If you did what was correct, you would amend the former return if the 4952 interest was deducted. If it was NOT deducted (i.e. rolled forward), then I'm supposing the return would not have to be amended.

The interest would not be deductible on Schedule E. But it would become capitalized into the cost of the building, and thus recovered through depreciation over a LONG time.

It matters little, but I've got big heartburn with IRS on this. If the building were purchased outright (instead of being built), the interest would be deductible. And if the taxpayer built the building with funds from his own pocket instead of borrowing the money, the taxpayer would record the basis of cost only because the interest wouldn't exist. I don't think the rules are fair. But they don't care what I think.

[Acownt4it]

Thank Snag

It matters little, but I've got big heartburn with IRS on this. If the building were purchased outright (instead of being built), the interest would be deductible. And if the taxpayer built the building with funds from his own pocket instead of borrowing the money, the taxpayer would record the basis of cost only because the interest wouldn't exist. I don't think the rules are fair. But they don't care what I think.

Your reasoning is why I researched this so long on my own before posting, I was thinking along the same lines and couldn't find what I was looking for. Now I know why.
Dang.
It was done correctly, and the interest was rolled forward. So no amended returns are needed.
My next question is how do I move the $86K that was rolled forward from Form 4952 to the buildings cost basis to depreciate over 39 years?

[Roland Slugg]

Amended return

The person who prepared the 2006 return did the correct thing by not deducting the interest, but the wrong thing by reporting it on F-4952. By doing the latter he may have allowed some of the construction interest to be deducted in 2006 ... up to the amount of the T/P's investment income.

The interest during the construction period must be capitalized. See Code §263A and related Regs. (The requirement to capitalize interest is specifically mentioned in Regs. 1.263A-1(e)(3)(ii)(V))

Whether or not it makes any difference in the T/P's 2006 tax, I would recommend filing an amended 2006 return, removing the construction interest from F-4952. Sometimes amended returns are necessary in order to correct the record. This is one of them.

Get the capitalized interest onto Schedule E ... actually onto F-4562 ... by simply including it in the completed cost of the building. If books are kept, make a journal entry removing the interest from an expense account and charge it to the building's cost account.