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How Long Can a Property be a Business Expense?

February 13, 2014
Business Expenses

Inman News explores when a property can be listed as a business expense and when it cannot.

Let’s say you own property that you intend for further development. Everything seems to be going great and for years you claim it as a detectible on your taxes, as a “business expense”. A legally valid move, to say the least. But now imagine that things aren’t going as planned for any number of reasons- local legislation throws a wrench in development plans, the market takes a hit, investors back out, investment generally stalls. Even though it was claimed as a business expense for so long before, can that same property still be claimed as a business expense now?

Stephen Fishman explores this topic over at inman News, putting the circumstances of a New York couple trying to develop land in upstate New York under the proverbial microscope. Albert and Nai-Fen Chen managed to purchase the land, but all the following years saw were seemingly endless cycles of planning and revision. At last, the IRS declared they could no longer claim a business deductible on their land. Tax courts, in favor of the IRS ruled that for business deductions to be valid, the operations have to reach an actual business level, not just planning and development.

Legally, if development is stalled, property values plummet, or any other circumstances cause you to bow out of a potentially profitable venture, you can still claim deductions as an abandonment loss. It seems like a perfect exit, but there are more than a few caveats one should know before pursuing this route. Tax courts require you to prove that the property in question is indeed abandoned, by requiring that it fulfills several requirements. Generally these requirements center around the condition that the property is void of all potential usefulness to the owners, including its permanent removal from operations in the taxpayer’s business ventures.

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