Rental stopped, New house will be built

[Caroline]

Hi!

I have an Illinos LLC reporting  rental activity that ended in June. After that the house will be demolished and a new house will be built.(as od Dec 31 the house was still standing, but in March 2023 it was demolished)

I need  the depreciation to stop accumulating as of  June 16, but I don't know how to go about it in Pro Series.   The carrying cost for the rest of the year I plan to capitalize. 

The LLC files 1120S.

[Frustrated-in-IL · Accepted solution]

On the depreciation entry worksheet, enter a sale date and nothing else.  That will stop it as of that date.  You will get a diagnostic about needing to complete the form but you can ignore it.

[Caroline]

That confirms what I thought,  but it didn't sit well with me, because that property wasn't actually disposed of, but I guess that's the way to go.  Now, when the house is built and sold, I will need to make  depreciation recapture for the time during which it was rental. I was wondering where would be the best spot to do  that  in the pro series. 

[rbynaker]

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@Caroline  wrote:

Now, when the house is built and sold, I will need to make  depreciation recapture for the time during which it was rental. I was wondering where would be the best spot to do  that  in the pro series. 

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Unresearched but I'm not sure that's how it works.  The structure that was being depreciated was demolished, not sold.  Assuming this was a complete demolition, the demo costs and the remaining basis of the old structure get added to the basis in the land (see IRC 280B)  The new structure will have its basis calculated based on the new building costs and, when sold, will have no accumulated depreciation to recapture because it's never been placed into service.

[Frustrated-in-IL]

The property will carryover to next year. Best way to carry that depreciation previously taken is to make sub-schedule for land.  You should already have an amount for land.  You put that amount, the amount for accumulated depreciation to date stopped, plus the undepreciated amount on the schedule, with each amount identified.  Thus, the unadjusted basis will equal land and program won’t do anything funky.  The asset won’t show up anywhere on the return but rather just sit in background.  Just remember to check box on schedule to NOT print with return.

When you get to year of sale, or placed back in service, you know where all the numbers are and can easily put them where they need to go.

[Caroline]

Makes sense.  Thank you. 

[Caroline]

 I will save these tips until next year.  Although I don't know if i will be able to do the sub schedule that you mentioned. I haven't really done anything like this before. How do you usually report  a new build that is sold?  Do you put the sales price in the gross receipts and the cost of build in cost of goods sold while nothing is left in the balance sheet. During the year of construction the cost is capitalized l so I have it one the balance sheet together with land and loans, etc., but after the sale balance sheet zeroes out, correct? 

[qbteachmt]

"Do you put the sales price in the gross receipts and the cost of build in cost of goods sold while nothing is left in the balance sheet."

Nothing would be left when the sale closes, because they sold it. Until then, all costs are accumulating, since that is the investment (basis) in the reconstruction.

"I haven't really done anything like this before."

Is your taxpayer "in the business" which makes this Inventory and then the sale is income?

Or, is this an investment property, which is capital gain?

[Caroline]

He is a general contractor. He builds spec houses,  puts them on the market and sells them. Usually it  is one house at a time and one LLC per  address. The project will last from about 10 to 17 months. In this instance the original property was rented for about 2 years, before the house gets demolished and a new build is done.

[qbteachmt]

Okay, then just take each event separately.

The old house was not sold. Think of that residual value not as lost, but as reinvested. The residual value and the cost to demo is all part of the investment in the new project. The Land asset didn't change.

The construction in progress will be accumulated as a new asset, the same as creating their own inventory item. When it sells, the accumulated asset costs from all the events are COGS for the date of sale. The sale is income. Now you see Profit on that project.

Spec houses are always WIP or CIP = work in progress or construction in progress, an accumulation of costs for an asset that remains on hand until sold. That's how it is different than Placed in Service. Placed in Service, meaning in use for business purposes, is why you get to take depreciation = starting to wear out a bit over time.

Hope that helps.

[Caroline]

It does. Thank you!