TYPE OF GAIN FOR CONSTRUCTION IN PROGRESS

[jskouberdis]

Good Afternoon Community,

I have a question about selling the asset Construction in Progress.  I have a client that is in the process of selling an uncompleted shopping center.  The last few years I have been accumulating costs in a Construction in Progress Account because this company is building a shopping center to rent out to businesses.  Somebody approached them a couple of weeks ago before this building has been put into service.  From the research that I have done if they sell at a loss it will be a short term capital loss.  It will not qualify for ordinary loss treatment because it was not in business use for at least one year.  If they sell at a gain I assume the same will be true that it will be a short term capital gain because it was not in business use for over one year.  Has anybody had any experience with this and how did you handle it.

Thanks,

John Skouberdis

[Terry53029]

This is what google AI has to say.

Selling a project under construction, or Construction in Progress (CIP), requires special accounting treatment. The project's costs are accumulated in the CIP account until the project is completed, at which point they are transferred to the appropriate fixed asset account. If the project is sold before completion, the sale price is recorded as income, and the CIP account is cleared out, with the costs recorded as cost of goods sold, according to QuickBooks. 

[jskouberdis]

Terry53029

I am not sure that fits my situation.  This company is a commercial real estate company.  They are not in the business of doing construction work.  They undertook this as a special project.  Using cost of sales and sales would look like they were a construction company that did this as their main line of business.

John

[qbteachmt]

"This is what google AI has to say."

Seriously? Wow, nice link. If I had known my input would be used for AI, I would have sold my brain to Google.

"Using cost of sales and sales would look like they were a construction company that did this as their main line of business."

Are you confused between an operating loss and asset loss? Short Term gain or loss is treated as ordinary income, but that doesn't prove they are a construction firm. It's just the tax treatment. They were creating their own Capital/Fixed Asset, no differently than someone manufacturing their own production or tooling equipment.

CIP is an asset and the sale proceeds are offset by the costs. It really is that simple. Maybe a separate case can be made for the land.

[jskouberdis]

qbteachmt,

From the research that I have done in order to get ordinary loss treatment the asset has to be in business use for at least one year.  In other words they would have had the shopping center open for one year or more.  In this case based on my research this is a capital loss whether short term or long term it keeps it's character as a capital item.  Subject to being offset by other capital gains and only allowing a net capital loss of $3000 per year.  The ordinary loss treatment would be a section 1231 loss that one of the requirments would be that it is used in business for at least one year.

John

[qbteachmt]

You stated this is a multi-year build.

I found an article for you that might help with bifurcating the land:

https://weaver.com/resources/bifurcated-holding-periods-can-improve-real-estate-returns/

[BobKamman]

"From the research I have done" -- maybe you could cite it?  There are people around here who don't know any better who think AI is "research."  

[jskouberdis]

Bob Kamman,

Based on the sec 1231 loss rules an asset has to be used in a trade or business for over one year to get ordinary loss treatment.  There is a post on Intuit help "Understanding net section 1231 gain (loss)".  This post emphasizes the one year of business use rule.

John

[sjrcpa]

Setting aside 1231, why not just ordinary trade or business income/loss?

I don't know the answer, just throwing it out.

You said construction is not their regular business, but maybe they entered into construction for this one project.

[jskouberdis]

sjrcpa,

I don't think that would fit.  They are into commercial real estate management and they are not builders.  I think I would be stretching things out by saying that this is regular sales and the expenses are cost of sales for this one project that they did.  And the loss is quite big at one million dollars.

John

[BobKamman · Accepted solution]

"I am not a builder," the builder insisted.

"If the shoe fits we are going to make you wear it," replied the IRS auditor.