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IRS rule to further burden residential developers.

IRS rule to further burden residential developers

A provision in the interest capitalization rules recently proposed by the Internal Revenue Service may impose new financial hardships on already hard pressed residential real estate developers, according to James E. Connor, a partner in the National Tax office of Coopers & Lybrand, the international tax, accounting and consulting firm.

The proposed rules, if finalized in current form, could require developers to capitalize the interest expense of property to be developed even before they begin construction of residential units.

As soon as a developer starts work on perimeter roads or other common features that benefit all units within a residential community, that date would be considered the beginning of the production period for the entire development, even if no work had begun on the homes. The developer would then be required to start capitalizing interest on undeveloped land in the project, according to Connor. Developers now deduct these costs currently, as part of the pre-production phase of development.

"Developers might no real not realize that, under these proposed rules, they could be required to capitalize land very early in the development process. The reason is that certain amenities of a housing development, such as roads, are often begun before the houses themselves," explains Connor.

"This financial burden is being imposed at a time when developers are already suffering from earlier tax law changes and the current depressed real estate market," he adds.

Connor says the IRS plans to hold hearings on these rules on Nov. 20. He suggests that developers who are concerned about this issue make their opinions known to the IRS, either in writing or through oral commentary at the hearings, which present an important opportunity to comment before finalization of the rules.
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Title Annotation:could require developers to capitalize interest expense of property to be developed before construction begins
Publication:Real Estate Weekly
Article Type:Brief Article
Date:Nov 13, 1991
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