Discussion:Capitalized interest
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Discussion Forum Index --> Basic Tax Questions --> Capitalized interest
Discussion Forum Index --> Tax Questions --> Capitalized interest
Bushmaster (talk|edits) said: | 12 June 2008 |
| I have a client (S CORP) who is a general contractor. He built a house at the beach (on his personal land) with the intent to sell it (a spec house). Since the beach market has pulled way back, he hasn't been able to sell it and decided to rent it out last year on a weekly basis (most beach houses are rented this way) in order to generate some money to pay the interest.
Originally, I had been capitalizing all costs associated with the construction in an inventory account, including interest. Well, the house is now complete. Looking at all the applicable sec 263 sections, subsections, etc., I can't seem to find anything that is this specific. He is a contractor, but this is not a long term contract as no contract existed. He built a house to sell it (inventory). It seems as if inventory fits the bill closest but it did not reach the $1 million threshold. The S Corp had a very small loss, he has basis to burn, and about $50k plus of interest, and he completed the job in April of 2007. Could I (could being the operative word) deduct interest from May to December or is it required to be capitalized? | |
| 12 June 2008 | |
| Per 263A - f it says that interest is capitalized when paid or incurred during the production period. I have read elsewhere that once the property is ready to sell that (or in this case rent) it is no longer in the production period and interest can be expensed instead of capitalized.
Question for you - I am working on a partnership return - 1st year in business and bought a home to fix up and sale therefore no contract exists. I am trying to determine the method of accounting. Would this still be cash (very small contractor) even though all of the expenses will be capitalized as the home was not complete as of the end of 2007? | |
RoyDaleOne (talk|edits) said: | 12 June 2008 |
| Yes cash method can still be use by a small contractor. However, why would you?
You may have payables and no receivables. | |
Bushmaster (talk|edits) said: | 12 June 2008 |
| Roy, any insight into my problem? This item is still carried in inventory and is for sale. If push comes to shove, the client is considering selling his own house at the beach and buy this one out of the corp. I certainly don't want to capitalize a bunch of interest if he can get a deduction thru the S Corp on this. | |
RoyDaleOne (talk|edits) said: | 12 June 2008 |
| If the property is convert to rental then yes the interest is deductible as a rental expense.
Note real property and houses are never true inventory, that is you can not use "inventory accounting methods". Interest may be deducted after the production period of the property ends (if the other requirements for a deduction are satisfied), Reg. Sections 1.263A-8(a), 1.263A-9(a), and 1.263A-12(c). | |
