The IRS Penalty for Real Estate Developers | USTaxAid

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The IRS Penalty for Real Estate Developers

Written by Diane Kennedy, CPA on February 10, 2011


As buyers slowly come back into the real estate markets and other active real estate investors proclaim they never left, it’s time to get to back to some of the basics of real estate tax.

There are four definitions related to real estate and the IRS that you need to know:

  1. Real Estate Professional,
  2. Real Estate Dealer,
  3. Real Estate Developer, and
  4. Real Estate Investor.

Each definition means a different tax strategy. Choose wrong and you can look at a big IRS mess.

Here’s a real life story from the Real Estate Loopholes Home Study Course.

Developer? Who, me?

Tom and Cecilia had a successful real estate investment and property management enterprise. They had a staff of four people who helped them with the ongoing maintenance and bookkeeping for their investments. They wanted to keep growing their business, but had reached a point where they simply couldn’t find the deals on more real estate investments. So, they decided to build new properties.

Tom had a contractor’s license and they already had the beginning of a staff to work with the sub-contractors he needed.

They bought their first parcel and began construction on a large, multi-unit apartment house. At tax time, though, they discovered that they couldn’t take a deduction for any of the payments on the land, the down payment or the out-of-pocket expenses for construction. But, they also discovered, even worse news. A large portion of the administrative and salaries for their employees were now no longer deductible.

The construction of the apartment building made Tom and Cecilia now subject to Uniform Capitalization on all of their administrative expenses, even those that used to be deductible through the rest of their real estate investment business.

Avoid Real Estate Developer IRS issues by planning ahead with solid information and experienced advisors.

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