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We have an LLC with 2 individual members which owns a tract

Customer Question
of land held for future...
We have an LLC with 2 individual members which owns a tract of land held for future appreciation. Only activity in 2008 was payment of real estate taxes and interest on the mortgage which was used to acquire the property. LLC taxed as a partnership. Both members are personally liable on the loan.
How are these items reported on Form 1065, Schedule K-1 Part III and on members’ individual tax returns?
Submitted: 8 years ago.Category: Tax
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Answered in 27 minutes by:
3/2/2009
Tax Professional: Lev, Tax Advisor replied 8 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
Experience: Taxes, Immigration, Labor Relations
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You are subject to the uniform capitalization rules if you do any of the following in the course of a trade or business or an activity carried on for profit:

  • Produce real or tangible personal property for use in the business or activity
  • Produce real or tangible personal property for sale to customers
  • Acquire property for resale. However, this rule does not apply to personal property if your average annual gross receipts are $10 million or less

Base on your information (1) you are holding the tract of land in your course of a trade or business - because it is held in LLC; (2) the property was acquired for resale - therefore you are subject to the uniform capitalization rules.

 

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.

 

According to the uniform capitalization rules (UNICAP) for costs that benefit or are directly associated with the production activities should be capitalized.

Indirect Costs Required to be Capitalized

  • Indirect labor costs
  • Officers compensation
  • Pension and other related cost
  • Employee benefit expenses
  • Indirect material costs
  • Purchasing costs
  • Handling costs
  • Storage costs
  • Cost recovery allowances on equipment, including depreciation and amortization
  • Depletion
  • Rent
  • Taxes
  • Insurance
  • Utilities
  • Repairs and maintenance
  • Engineering and design costs
  • Spoilage
  • Tools and equipment
  • Quality control
  • Bidding costs
  • Licensing and franchise costs
  • Interest
  • Capitalizable service costs

Indirect Costs Not Required to be Capitalized

  • Selling and distribution costs
  • Research and experimental expenditures
  • IRC section 179 costs
  • IRC section 165 costs
  • Cost recovery allowances on temporarily idle equipment and facilities
  • Taxes assessed on the basis of income
  • Strike expenses
  • Warranty and product liability costs
  • On site storage costs
  • Unsuccessful bidding expenses
  • Deductible service costs

Based on your information - real estate taxes and interest on the mortgage should be capitalized - or added to the basis of the property.

Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,130
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