Cost Basis: Construction Project Planned but Never Started

[llcg]

We have racked up nearly $75k in fees (architectural, structural and geotechnical engineering, permitting, surveys, etc.) associated with the planning of the construction of a house.

We unfortunately have to sell the property without having started the construction, and since those planning costs are nearly half of what we expect to realize in gains, need to understand whether they can be included in the cost basis of the property.

In case it is relevant (although I suspect it isn't), this was a second/investment property (not a rental), but we did live there for six months about a year ago, and have owned it for three years.

[RobertG]

Yes, the engineering and other fees are includable in your basis in the property.

The fact that you lived there is not relevant unless it was your primary residence long enough for it to qualify as the sale of a residence.

• You owned the home.
• It was your main home for two years or more within the five years leading up to the sale.
• You waited at least two years between selling your primary home and excluding your first $250,000 or $500,000 from taxes. In other words, you may buy and sell as many primary homes as you'd like, but you'll only get this tax benefit every two years.

[llcg]

Thanks for the information, @RobertG!

I'm not sure whether it was clear, but I failed to state explicitly that all these planning costs were incurred after purchasing the property -- I hope that does not affect anything here.

Also, do you happen to know which relevant rules support this cost basis adjustment?

[RobertG]

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.

IRS Publication 551 Basis of Assets

[llcg]

@RobertG, thanks again for responding.

I had found that same information from the IRS, but that only covers the typical scenario where something is actually constructed, however nothing was ever constructed in this case.

Because of its summary nature, it doesn't state anything about uncommon scenarios like ours -- which doesn't necessarily mean that the underlying rules do not permit counting these costs against the cost basis.

Thoughts?

Thanks!

[AmeliesUncle]

I don't think it should be added to Basis.  Nothing was actually done to the property being sold.

Also, you should really consider going to a tax professional.  If you are at the income or asset level that you spend $75,000 planning construction of a house, is seems silly to be doing your own taxes.  I've seen countless situations where a person does their own taxes and at some point during their life they do something that a tax professional could have saved them thousands of dollars.

[Carl]

I don't see anything here that's deductible, or that would add to the coast basis of the property, based on the fact all you did was "plan" and nothing was actually done to improve the property. If you disagree with my assessment, then I would highly recommend you seek professional help.

[xmnstn]

I have the same situation this year, on a smaller scale than yours though. Did you ever get a firm answer to your question? 

[llcg]

Unfortunately not.

[DaveF1006]

Yes, although the IRS does not give clear guidance on this, I agree with super champ Hal-Al, in his Turbo Tax post to treat this as an investment loss.

1. Go to federal>wages and income>investment income>stocks, bonds, other
2. Now you will answer some preliminary questions.  Say no if you did not receive a 1099B. When it asks for the type of investment
3.  Next screen is critical because it asks you for the sale price, description, what you originally paid for it, date sold, date acquired etc. For the sales price, put 0 since the fees went up in smoke figuratively. 
4. Once recorded, you should have an investment loss.
5. Keep in mind, capital losses can only be claimed $3 per year. Whatever is unused for this year will be carried forward indefinitely or until used up.

@xmnstn   @llcg