The Surprising Problems with Real Estate Developer Tax Status
You may be a real estate developer if:
- You buy land and hold it for later development,
- You buy a commercial building and convert it to condos,
- You buy a house that needs extensive rehab before it can be sold or rented, or
- You buy land to turn it to into a trailer park.
There are hundreds of other examples of real estate developer situations. It all comes down to one thing. Have you put the property into service first? If so, you’re not a developer, at least not yet.
Tax Strategies for Real Estate Developers
A real estate dealer has two big tax issues. First, expenses used to develop and carry the property are not deductible until the property is put in service. That means you have to capitalize the property, interest you pay during the development phase, property tax and all improvements.
The second issue is that as a real estate developer you also need to capitalize a portion of indirect costs. This is a more complicated area of tax law, so you’ll definitely want an experienced CPA helping you with this.
Here’s how it works. The IRS says that because you are building an asset, then all expenses (with a few exceptions such as marketing) must be capitalized as well. If you have some development and some other business, then you need to pro-rate the expenses so that some are capitalized and some can be immediately expensed.
Let’s use an example to show how costly the real estate developer designation could be. Assume you have a construction business. You have an office staff and you have guys in the field, trucks, tools, the whole shebang. And then you decide to buy a property and use your crew to fix it up.
During the time that you are fixing up the property and before it’s put in service, you must capitalize some of the normal expenses your construction business has. It’s more than just the salary and expenses for the guys working on the property, it also includes your office rent, office equipment and other general & administrative costs.
In other words, starting a real estate development when you already have a real estate business (or any other business for that matter) can mean you lose tax deductions.
Are you concerned that you might be a real estate developer? Talk to a CPA who has experience with real estate tax and especially real estate developer status. You can find out more about our services at http://www.USTaxAid.com