There are various real estate expenditures that are deductible to the corporation and others that are capitalized or allocated to inventory. In this FAQ, we will discuss the real estate expenses that are deductible during the pre-acquisition phase as an operating expense to the corporation in the fiscal year that expenditures were incurred.
There are many “soft” costs in real estate such as representation costs, site investigation costs and financing expenses.
Representation costs are eligible for a deduction for amounts paid in the year. Examples of these costs are rezoning applications, project planning and preliminary design costs.
There is no requirement to own the property when the expenses are incurred in order to receive a tax deduction. Representation costs related to depreciable property would not be eligible for a deduction, but would be eligible for capital cost allowance (see future FAQ in series).
Site investigation costs are eligible for a deduction for amounts paid in the year. Examples of these costs are survey costs, engineering costs, environmental studies, feasibility studies and legal fees relating to reviewing limitations on use. The taxpayer must be carrying on an active business to be eligible for this deduction in the year. If it is property income such as passive rental income, then these expenses would be capitalized to the cost of the land.
Financing expenses may be incurred before a property is acquired. If the purchase of the property does not occur and the corporation is in the business of real estate development, then the financing expenses are deductible as they were incurred to earn income. If the property was purchased, then these expenses would be amortized over five years for tax purposes.
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Author: Grant Gilmour has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.