How to report cost of minor subdivision

Question

I have a duplex building consisting of 2 twin homes.  They have completely separate utilities (separate accounts) but are on 1 tax parcel.  The other buildings on street are similar but each twin is on it's own tax parcel and deed so they are independently owned and taxed.  I'm looking to sell the building and would like to subdivide so I can sell each twin separately.  As I'm exploring the process and associated costs, I wondering how these costs would be reported.  Has anyone been through a similar process?

Dylan Brown · Answer

@Denise B. Got it.

The costs incurred would not be deductible - instead they would be recorded to the basis of the land.

Because you are subdividing into two parcels, you would need to take the original basis of the land (what you paid originally) and divide it in two parts based on the land area. For example, if you purchased the lot with buildings already on it for 500k and according to tax records the land value in the year of acquisition was 20% of the assessed value, your basis in the land is 100k (the other 400k is the basis in the buildings).  If you were to split that into two equally sized lots, then the land basis would be 50k each.

Then you would also split the costs incurred to split the lot. So if you incurred 10k in costs, that would increase the basis from 50k to 55k each.

Then once you ultimately sold the property you would be able to use that basis in calculating your gain on the property for tax purposes.  The end result is that your gain will be 5k less per property when you go to sell because of the 10k of costs you incurred.

TLDR: you can't deduct the costs right when you incur them, but you will still get the tax benefits from incurring the costs when you ultimately sell each lot.

Denise B. · Answer

@Dylan Brown   Thanks Dylan - appreciate the detailed explanation!

Dylan Brown · Answer

I have had several clients do the same.  Are you trying to learn how to report these for tax purposes?  Just trying to clarify the question before I take a shot at answering.

Denise B. · Answer

Hi Dylan - yes I'm trying to learn how the costs would be reported for tax purposes.  I just report on a schedule E (no LLC's or other entities involved).  The costs would include attorney fees, zoning application fees, surveyor fees, etc and will likely be in the $10K-$20K range.