Many developments may face all of the tax planning issues. In particular, typical projects realize substantial sales in the initial years of the development and it is typical that cash flow is not readily available to fund a significant tax liability at this stage in the project.
Tax planning opportunities may be available to help defer the recognition of the lot sales income or reduce the gross profit on lot initial sales, thus substantially deferring the projected tax costs to the owner(s) in the initial year(s) when net cash flow is limited or nonexistent. This may also result in a more accurate determination of the true profits realized when the recognition occurs at a date later in the development timeline and may avoid having to extend your statute of limitations for up to 10 years if future cost methods were to be elected (the alternative cost election under Rev. Proc. 92-29 - one year after filing return for that includes the completion of the project).
In addition, many golf course will be retained and not transferred to members until an uncertain date in the future. Such projects may incur "excess costs" in constructing the golf course and related amenities. For these purposes, "excess costs" are defined to be the total direct and indirect cost of such tangible assets in excess of their value as a separate trade or business. As discussed in the Industry Background, the industry has historically taken the position that such costs, as determined by appraisal, are allocated to the basis of lots being developed. Thus, the "excess cost" would be deducted as a cost of lots sold -- as compared with no deprecation, 15 year depreciation, or 39 year depreciation until the golf course and other facilities are sold. The allocation of such excess costs to the cost of lots has merits; however, the authoritative support is limited, the IRS has indicated it will vigorously contest this and one court has decisively supported the IRS.
Alternative tax planning opportunities may be available if excess costs are present. These strategies may result in tax benefits immediately after completion of the Club and facilities and may have greater authoritative support than the allocation position.
Private, for-profit clubs typically utilize 30 year deposits for membership initiations. The IRS has generally accepted the fact that, if properly structured, such deposits represent bona fide loans and they are not presently subject to the interest imputation rules.