Basis of investment property

[jpbrehm]

A builder buys a property, demolishes the house on it and then builds a new house which is sold.  Can the original purchase expenses be included in the basis of the new house?

[jpbrehm]

Since I've received no answers maybe I need to clarify.  The answer I am looking for is whether the entire purchase of the property can be used in the basis since the house on it was demolished or does it have to be prorated to only show the portion that would be the cost of the land.

[TaxGuyBill · Accepted solution]

The Basis of the demolished house goes into the land.  So the land has high Basis. 

The Basis of the new house is the cost of the new house, and the old house does not affect that.

[BobKamman]

I agree.

Basis of Land = total purchase price of both land + demolished house. 

Basis of Improvements = total cost of putting up new building on cleared land.