A developer's appraisal and loan fees on a deal that failed

[Peachy]

Client incurred appraisal and loan fees in anticipation to borrowing funds for developing another project. Deal fell through and he has abandoned the idea of engaging in another project at least for the moment. Are those costs deductible 100% in the year incurred?

I read where it says it is not deductible for a primary residence but I can't find information when taxpayer in the business of development.

[itonewbie · Accepted solution]

Tax treatments for corporate and individual taxpayers differ partly because individual taxpayers need to establish that expenses incurred are ordinary and necessary and for what would otherwise be a trade or business that is engaged in for profit.  If these conditions are satisfied, it may be possible to deduct the expenses under §165(a) and (c).

See also Rev. Ruls. 77-254 and 71-191.

[Peachy]

@itonewbie Thank you so much. I have read up on the suggested rulings and the walk away for me based on Rev. Rul 77-254 is that these costs should be capitalized and amortized. Here is the basis for my conclusion...... "Rev. Rul. 77-254 (1977-2 CB 63). This ruling explains, "Once the taxpayer has focused on the acquisition of a specific business or investment, expenses that are related to an ATTEMPT to acquire such business or investment are capital in nature."
I think that both appraisal and loan fee expenses are indications that the taxpayer had attempted to acquire another piece of land for development. Is my thought process in line with the interpretation of the ruling? I just want to be confident when I address this with my client so any further clarification will help a great deal.

[itonewbie]

Yes, correct except the project was abandoned and a loss was incurred.  If you read these rulings again, you will see there were discussions that such costs may be deductible where the acquisition is unsuccessful.

[Peachy]

OK! I will but meanwhile thanks a whole bunch for your time and the help. I appreciate it very much!

[itonewbie]

NP, @Peachy.