Cost Basis for Spec Home

[AWJ13]

I have a LLC Partnership (file 1065) and last year we purchased a house for $125k and had it demo as we went through the replat process to sub-divide the land into 4 new lots to build 4 new spec homes. 

I know the purchase price of $125k is the cost basis and we divide that by 4 as we build and sell the spec homes to take the deduction. We are going to start building in the next 2 months. 

My question is, are the fees we paid to the city for the replat fees, cost of the house demo, soil test, and the cost to the engineer & development consultants who handled the surveying services, platting services and drainage plan is that added to the cost basis as well or we able to expense that on our taxes now?

I tried to look online but couldn't find anything concrete. 

Thanks

[Carl]

Everything you mentioned is added to the cost basis of the land.

[PatriciaV · Accepted solution]

Yes, the costs to ready the land for construction are considered Land Improvements and increase your basis in the Land. There may be some exceptions as you move closer to completing the project.

Per IRS Pub 946 (emphasis added):

You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up. The cost of land generally includes the cost of clearing, grading, planting, and landscaping.

Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.

Example. You constructed a new building for use in your business and paid for grading, clearing, seeding, and planting bushes and trees. Some of the bushes and trees were planted right next to the building, while others were planted around the outer border of the lot. If you replace the building, you would have to destroy the bushes and trees right next to it. These bushes and trees are closely associated with the building, so they have a determinable useful life. Therefore, you can depreciate them. Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them.

[tagteam]

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@AWJ13 wrote:

I tried to look online but couldn't find anything concrete. 

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Here is the Reg:

https://www.law.cornell.edu/cfr/text/26/1.165-3

[tatou1]

Hi there I have many questions on this subject. Last year January 2021 I sold a rental property that used to be my primary home for 10 years. When I first moved in I added a sunroom,  a brick patio, stove, refrigerator. My purchase price was $53,000 in Dec 4 1990.  I started renting it in July 2001. I did my taxes with turbo tax and the price listed for purchase was 55,000 instead of 53,000. I do not quite remember what I did to change the price. I supposed that I added the 2,000 dollars cost of the sunroom to the building. Now, Do I change back the purchase price to 53,000 when turbo tax ask?  If so how do I add the $2,000 for the Sunroom? Note that this cost has already been depreciated in turbo tax up to my last tax return 2020. Also I was able to take only 99.00 dollars out of 3,352. in closing charges for the purchase. Moreover I refinanced in 1993 and spent 1,954 in settlement charges. Am I able to use this amount in my cost basis?  If so where do I enter that? I have seen some discussions about how to enter sale for rental if the renter was the last person to occupy the house. Some people say that everything has to be entered under Rental and Royalties, others say in both Rental and Royalties to account for different expenses. I would like to have a final word about that. Finally, on the special handling section, Turbo tax said to enter yes if certain conditions where satisfied which I did but the community said to answer no. I have tried both ways. When I said No the program sent me to a section that was totally confusing to me and if I answer yes I couldn't continue. If anyone can assist me on this section, that would be a huge help.  I have several worksheet from my 2020 tax return and I can list the contents for whomever is willing to do a step by step entry with me. I cannot do the expert help on the phone because I feel too much pressure. Besides, I am learning a lot about taxes and do not want to quit  before trying all the resources available. I am grateful for any  help.  Thanks in advance.

[DianeW777]

Your questions will be shown in italics below and the answers will follow to assist you with your rental property sale. 

I supposed that I added the 2,000 dollars cost of the sunroom to the building. Now, Do I change back the purchase price to 53,000 when turbo tax ask?  If so how do I add the $2,000 for the Sunroom?

• No, you do not change back the purchase price. The $2,000 you added was the correct action because this was a capital improvement to the home before you began renting out the property. 

Also I was able to take only 99.00 dollars out of 3,352. in closing charges for the purchase. Moreover I refinanced in 1993 and spent 1,954 in settlement charges. Am I able to use this amount in my cost basis?  If so where do I enter that?

• It's not clear exactly why you did not include your purchase charges as part of the original cost basis when the home was converted to a rental property.  The settlement charges that were not used should be added to any sales expenses, which will reflect the correct net result (gain or loss).

Some people say that everything has to be entered under Rental and Royalties

• This is the correct action since you rental property was active on the 2020 tax return and should have transferred to your 2021 return. In other words you still have an active rental property that you are now trying to dispose of.  Follow the steps below to enter your sale.

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions
11. See the images below.

You might also review information here.

[tatou1]

Diane 

Thanks for your help. I am puzzled by the forms 4562 in regards  to depreciation  report. It shows a total of 36,726 which is the cost of the building plus a carpet. I also had window covers, refrigerator etc that were fully depreciated . I only see a carpet lister under the cost. That brings my total cost up to 2020 to 36,726. 

What happened  to the other items. I sold those with the house. My question is: 1.- Do I report their sales as well and if so are they listed somewhere else or do I need to manually enter them? 2.-What do I do with the 36,726 amount listed under cost? I thought turbo tax would transfer all the numbers that I need in their respective  fields since it has all the records for this rental except the sale price. I am really frustrated.  Hope you can help me with this questions. I appreciate all your help.

[RobertB4444]

@tatou1  You have two options - 1. You can divide the amount you were paid by the exact percentage of all of the individual assets that make up the rental property that you sold and then enter that in each asset so that you get the total sales price right OR 2. You can put the sale in just the way you already did and then go through each of the other assets that you have in TurboTax and enter the sale data but make the money received $0.  That will total up on your schedule D and 4797 exactly the same way but with a lot less work.

[tatou1]

Thank You Robert . Where do I find my assets list? On my 2020 return, the asset entry worksheet reports only my purchase cost with the land included in my purchase price and my prior depreciation(ie 55,000 total cost- cost of land 20,000) My amortization and depreciation report shows the amount for building, plus one of the four items that have been fully depreciated .I had some help with an expert yesterday. She used the amount showed under depreciable basis, added up the cost of the fully depreciated items plus expenses and other cost and did the allocation between the cost of the building and the Land. I do not feel comfortable with that because all the Guidance  I read on this forum says that the selling price should be  allocated across all depreciated items and we should dispose of every items and show a gain of at least 1$ on each item. How can it be done that way if the reported list of assets only shows one assets.  Do I have to go to add assets and manually enter and dispose of every one of them.Maybe her way is the simplest way of reporting the sales since she was helping over the phone, but I wonder if the IRS will except. We did not open the add an asset part nor the expense part. I would like to get your opinion if I should file the tax the way she did it or go back and do it the proper way.  Your help is very much appreciated. Looking forward to hearing your opinions .

[tatou1]

Very helpful  Diane'

My depreciation report for 2020 only shows the building and a carpet. I had 3 others items when I first started using the property as a rental but they do not show on the list. Do you know if I should  add them back or does that mean that they're  no longer an asset since they are fully depreciated?  Thanks in advance.

[DaveF1006]

@tatou1 These should still be listed in the Business Asset Summary list because you required to maintain this Business Asset Summary list until you report how they were disposed of, when they are disposed of. If the fully depreciated assets are not listed on the summary list, you should add these back showing they are fully depreciated.

Please read this Turbo Tax post from Cattlerancher for further details.