Discussion:Real Estate Development

I'm stuck preparing a return for an individual. I've spent about 4 hours on the phone with IRS trying to get an answer. I'm hoping you can point me in the right direction.

This person is an individual who has a full-time job but this past year has started to become involved in real estate development in order to get a post-retirement business going.

He materially participates in the business and plans to continue over the next several years.

He buys undeveloped land and spends time and money adding improvements. It may be as simple as adding wells or sewer lines, bringing electricity to the propery, or could include adding structures to the land - buildings, barns, houses. Last year he bought and sold two properties.

I want to treat this as Schedule C activity in order to deduct his reasonable and necessary expenses, including some depreciation on large tools and vehicles. He does have a substantial gain this year and he knows he will have to pay quite a bit in taxes.

My questions are these: Can he use a schedule C and factor in the property bought and sold as inventory? If this is the case, is the contract labor and materials used to construct the buildings and make improvements included in the cost of good? Would this be better treated generally as a capital gain transaction? If that's the case, can I deduct tools and equipment as an investment expense on the Schedule A?

Any thoughts or ideas on exactly how to treat this would be appreciated. Thanks for your help.

Charles Davidson