Land development deduction

[JessicaO]

My husband owns a home business but we also built a new home in 2020-2021. We did not move into the new home until 2021 and so husbands business did not officially move over until 2021. However, we did build a new 1600sq ft building on our new property that we will claim in the next tax year as a capital asset. My question is about the costs associated with building that building. We had to clear acres of land, bring in rock for a separate driveway, install drainage piping, do a lot of grading and then also pour a concrete pad. All of this was done in 2020 in preparation for the building which wasn't actually built until 2021. Can any of the land improvements be claimed and if so, where?

[ColeenD3]

No. These costs are added to the basis of the property.

Constructing assets.

If you build property or have assets built for you, your expenses for this construction are part of your basis. Some of these expenses include the following costs.

• Land.

• Labor and materials.

• Architect's fees.

• Building permit charges.

• Payments to contractors.

• Payments for rental equipment.

• Inspection fees.

In addition, if you own a business and use your employees, material, and equipment to build an asset, don't deduct the following expenses. You must include them in the asset's basis.

• Employee wages paid for the construction work, reduced by any employment credits allowed.

• Depreciation on equipment you own while it's used in the construction.

• Operating and maintenance costs for equipment used in the construction.

• The cost of business supplies and materials used in the construction.

[JessicaO]

Thanks for your response. I think I'm confused about when to deduct these costs. We spent a lot of money prepping the land in 2020, but I didn't have a physical building until 2021. My cost was incurred in 2020. Are you saying I have to wait and add it to the cost of the asset in 2021 tax year, even though I incurred the expenses in 2020?

[ToddL99]

Yes, you have to wait until 2021 to include these costs (site preparation, driveway, drainage, pad, etc.) in the total cost of the building. 

You cannot begin depreciating (deducting) the cost to construct the building until the year in which it is placed in service (i.e. completed and started being used for business purposes). For that reason, you do not enter the building as a building asset until 2021.