Discussion Archives:Carrying interest expense on developed property and unicap?

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Discussion Forum Index --> Advanced Tax Questions --> Carrying interest expense on developed property and unicap?


Discussion Forum Index --> Tax Questions --> Carrying interest expense on developed property and unicap?

Scottycoyote (talk|edits) said:

9 March 2011
It was always my understanding the interest expense incurred as part of land development being run as a business is part of cost basis until unit is sold under unicap. With the economy as it is, i have several developers who are stuck holding properties they cannot sell (whether its developed lots or completed houses) that they are still incurring interest on even though the project is complete. Would the interest they are now paying continue to be added to cost basis, or could it be deducted now, and if so how......on 4952 as investement interest to the extent of investment income, or on sch a subject to 2%? Ive read over 263 and 166 and searched on here and i just end up more confused. I completely understand during the production phase its 263, its just the after production but pre-sale phase im second guessing myself on.

Kevinh5 (talk|edits) said:

9 March 2011
I think they capitalize it until sold (or if rented, could deduct against the rental income).

Scottycoyote (talk|edits) said:

9 March 2011
thats what i thought too kevin...i understand the turning it into rental aspect but i thought as long as its being held for resale it keeps getting capitalized. The problem is so many people are holding property that normally they sold when it was completed that it was never an issue before. Also i think there is someone in my area that is allowing clients to do this, and of course all these people run in the same circles, and "if so and so can deduct his, why cant i deduct mine". Always before i would just say because you fall under unicap rules, but I wanted to revisit this to make sure im right.

RoyDaleOne (talk|edits) said:

9 March 2011
The interest on the completed houses is deductible.

RoyDaleOne (talk|edits) said:

9 March 2011
(1) IN GENERAL. If production activities related to the production of
    a unit of designated property cease for at least 120 consecutive days 
    (cessation period), a taxpayer may suspend the capitalization of 
    interest with respect to the unit of designated property starting 
    with the first measurement period that begins after the first day in 
    which production ceases. The taxpayer must resume the capitalization 
    of interest with respect to a unit beginning with the measurement 
    period during which production activities resume. In addition, 
    production activities are not considered to have ceased if they cease 
    because of circumstances inherent in the production process, such as 
    normal adverse weather conditions, scheduled plant shut-downs, or 
    delays due to design or construction flaws, the obtaining of a permit 
    or license, or the settlement of groundfill to construct property. 
    Interest incurred on debt that is traced debt with respect to a unit 
    of designated property during the suspension period is subject to 
    capitalization with respect to the production of other units of 
    designated property as interest on nontraced debt. See section 1.263A- 
    9(c)(5)(i) of this section. For applications of the avoided cost 
    method after the end of the suspension period, the accumulated 
    production expenditures for the unit include the balance of 
    accumulated production expenditures as of the beginning of the 
    suspension period, plus any additional capitalized costs incurred 
    during the suspension period. No further suspension of interest 
    capitalization may occur unless the requirements for a new suspension 
    period are satisfied. 
 
    (2) SPECIAL RULE. If a cessation period spans more than one taxable 
    year, the taxpayer may suspend the capitalization of interest with 
    respect to a unit beginning with the first measurement period of the 
    taxable year in which the 120-day period is satisfied.

Kevinh5 (talk|edits) said:

9 March 2011
MAY suspend

so it is optional to capitalize or deduct after production ceases but before sale. Thank you Roy. I wonder if one could optimize the return by doing some of both? Or capitalize for some units and deduct for others?

RoyDaleOne (talk|edits) said:

9 March 2011
Yes it is unit by unit of designated property.

Scottycoyote (talk|edits) said:

9 March 2011
so deductible where/how? This property is in a partnership, is it deductible as just ordinary interest expense on the front of the 1065? Or would it be investment interest on 4952?

Kevinh5 (talk|edits) said:

9 March 2011
if they are still in the business of developing and selling as a dealer, then ordinary

Scottycoyote (talk|edits) said:

9 March 2011
wow thats going to make them happy, of course its going to piss them off that i didnt let them do it last year lol. The bad part is i called natp research while i was waiting for an answer and they said it had to be included in cost but they would research it further and get back to me.

Scottycoyote (talk|edits) said:

9 March 2011
hey kevin what would constitute "still being in the business". When the real estate bust hit, they got stuck holding these properties and they basically havent developed anything since, and once this stuff is sold they wont develop anymore theyll close down the partnership and be out of it, but still actively trying to sell what they have pass the test you think?

Sid50 (talk|edits) said:

9 March 2011
The interest on the completed homes should continue to be capitalized, shouldn't they?

The taxpayer must resume the capitalization of interest with respect to a unit beginning with the measurement period during which production activities resume

Scottycoyote states in the op its just the after production but pre-sale phase Are there completed homes for sale now?

Kevinh5 (talk|edits) said:

9 March 2011
They are most likely still in the business. If they liquidated and distributed out the homes/lots to the members/partners/shareholders, then it would be obvious that they were not in the business.

I used the term 'dealers' to signify that they weren't 'investors'. Ordinary income/loss vs. capital gain/loss.

Scottycoyote (talk|edits) said:

9 March 2011
sid50 i read that section and i took that to mean if you stopped work on the unit for some reason (like bad weather, etc) but resumed later youd continue capitalizing....then once the project is done but sitting there and not sold for 120 days, then you could stop capitalizing, am i misunderstanding this?

Sid50 (talk|edits) said:

10 March 2011
We need to hear from RoyDaleOne and Kevin again. RoyDaleOne states on a completed house, the interest is deductible.

The taxpayer must resume the capitalization of interest with respect to a unit beginning with the measurement period during which production activities resume.

The production period for a unit of property produced for sale ends on the date that the unit is ready to be held for sale and all production activities reasonably expected to be undertaken by, or for, the taxpayer or a related person are completed.

Scottycoyote (talk|edits) said:

10 March 2011
ok ive read and read and read, and good lawd i know way more about this now than i ever wanted to lol. I only have one other question about this that i want to be sure on, roydale you really seem to have a handle on this so maybe you can chime in, but when it comes to this part of 263

(f) Special rules for allocation of interest to property produced

       by the taxpayer
     (1) Interest capitalized only in certain cases
       Subsection (a) shall only apply to interest costs which are -
         (A) paid or incurred during the production period, and
         (B) allocable to property which is described in subsection
       (b)(1) and which has -
           (i) a long useful life,
           (ii) an estimated production period exceeding 2 years, or
           (iii) an estimated production period exceeding 1 year and a
         cost exceeding $1,000,


exactly what does this mean lol. Did the property have to have a production period of 2 years and/or cost over 1 mil and period over 1 year? I think by definition real property has a long useful life. In the case of my clients, the subdivision they built didnt take 2 years to build and didnt cost over a million, but it is complete now and ready to sell, which seems to meet the post production definition.

RoyDaleOne (talk|edits) said:

10 March 2011
Please restate your question, if you still have one. Thank you.

Scottycoyote (talk|edits) said:

10 March 2011
sorry its late and my eyes are crossed over this. My question is pertaining to that one section of 263 f)special rules. Where it states above (sorry i should have underlined it) the interest has to be capitalized regarding subsection A, the property has to have a useful life, estimated production period exceeding 2 years or estimated production period exceeding 1 year and cost exceeding $1mil.

Does this section factor in to my original question in any way. In other words, does the fact that my clients project didnt have an estimated production time of 2 years or 1 year and exceed $1mil, somehow change their ability to now stop capitalizing the interest on the property since its completed but just unsold.

RoyDaleOne (talk|edits) said:

10 March 2011
(1) IN GENERAL. Except as provided in paragraphs (b)(3) and (b)(4) of
    this section, designated property means any property that is produced 
    and that is either: 
 
         (i) Real property; or 
 
         (ii) Tangible personal property (as defined in section 1.263A- 
         2(a)(2)) which meets any of the following criteria: 
 
              (A) Property with a class life of 20 years or more under 
              section 168 (long-lived property), but only if the 
              property is not property described in section 1221(1) in 
              the hands of the taxpayer or a related person, 
 
              (B) Property with an estimated production period (as 
              defined in section 1.263A-12) exceeding 2 years (2-year 
              property), or 
 
              (C) Property with an estimated production period exceeding 
              1 year and an estimated cost of production exceeding 
              $1,000,000 (1-year property). 


Guessed you missed the real property or tangible property bit.

Scottycoyote (talk|edits) said:

10 March 2011
ahh, sure did thanks roy. I swear i get to reading this stuff and the "section a except subset b2(i) but only on the third monday of a leap year"....i dont know my own name when i get to the end of the page. I dont know how you guys read this stuff and have it make sense but im sure glad you can :)

thanks again for the help

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