Question

Which of the following statements is false?

A. The IRS has ruled that a developer is permitted to include in the basis of parcels sold the allocable share of ESTIMATED costs of common improvements even if they have not yet been incurred or paid by the developer, and without regard to the economic performance requirements of IRC§461(h).

B. The basis of subdivided lots generally includes a pro-rata portion of the cost of developing the parcel to make it suitable for subdivision as long asthe apportionment takes intoaccount any differences in relative fair market values.

C. The costs of improvements made by a developer for roads and utilities may be added to the basis of parcels sold when the developer retains control of the improvements and commercially exploits them as a separate business.

D . All of the above statements are true.

Answer 1

The answer is D. All of the above statements are true. The reasons are explained below.

A. True, Under Section 461, the developer can deduct the recurring expense only when

1. The economic performance occurs for not more than 8.5 months.

2. All the event tests are satisfied without regards to economic performance.

3. the expense should be recurring and he must be treating it is as an expense from the beginning.

4. the item is not material or say the item is accrual with the almost same income flow with or without the tests made by the absence or presence of the economic performance occurs

B. True, but if the lots are sold not as a business of real estate it's a capital gain but if it's sold as a business of real estate it's ordinary income and both have different tax basis. And pro-rata portion is included when the terms and conditions as explained above are maintained as long as the apportionment takes any differences in relative fair market values.

C. True, Since the developer has full control of the improvements he can add it to parcel but once referring the IRS sections and provisions