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Posted by Harlan Lunsford on May 25, 2007, 10:51 pm
Please log in for more thread options DORFMONT@aol.com (Linda Dorfmont) wrote:
> I recently acquired a corporate client (C Corp.) who buys
> residential real estate, fixes it up and resells it. His
> previous CPA put most of his operating expenses (property
> taxes, mortgage interest, sales expenses, etc.) into the
> general & admin. section of the P & L. Last year (2005) he
> had to change accountants and the new one put all that into
> cost of goods sold. Needless to say there is a vast
> difference between the gross profit sections of the 2004 and
> 2005 returns.
>
> What is the preferred way (that will make IRS happy) of
> reporting these expenses? I tend to side with the first
> accountant who specialized in this area.
>
> Both accountants showed the property assets in "other
> assets" on the balance sheet. I would treat this as
> inventory since that is what it is. I guess my manufacturing
> background is coming out. Is there a reason it is not shown
> in inventory?
This is similar to a client here who bought more than a 100
acres for development. Each commercial parcel was of a
different size, and the residential lots more or less equal
in size. All costs had to be first identified with the
parcels affected and then capitalized according to acreage
of each parcel. Thus all lost were part of inventory.
Even the interest was capitalized, thus there was very
little g&a expense.
> Also my client is buying property to flip in Texas. He plans
> to hold it for a while until the market recovers to a level
> where he can recover his costs and make a profit. If he
> rents the property out for the convenience of his company
> while he is holding it, does he have to take depreciation?
> The property was acquired in the normal course of business
> and will be sold at an appreciated price. The rental is just
> to get some income to cover costs while it is being held.
I don't see any way out of taking allowable depreciation as
a matter of course. After all, a bird in the hand is
worth.... two.. uh... how does that go?
ChEAr$,
Harlan
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