Coddington wrote:Developers can't use section 471 for their "inventory", since it isn't merchandise. Since it isn't inventory under 471, they cannot elect NIMS treatment. Examples 17 and 18 of Rev Proc 2002-28 may be instructive in what is possible.
I'm confused by a couple of things here.
Example 17 of Rev Proc 2002-28 says "Because the house is real property held for sale by Taxpayer, the house and the material used to build the house are not inventoriable items under this revenue procedure. Thus, Taxpayer may not account for the items used to build the house as non-incidental materials and supplies under § 1.162-3." On the other hand,
this article says "The most favorable impact will be to manufacturers that will now deduct the cost of purchased raw materials when the materials move out of storage into the work-in-process phase. Direct labor and direct overhead will be immediately deductible under this method. For resellers and distributors there is much less of an impact since it will be likely that their material purchases will be used or consumed when the product is sold to customers."
Is the article correct? If so, what distinguishes a real estate developer from a manufacturer? In both cases, material and labor are combined to create a finished product. Is there some rule that distinguishes real property from inventory?
If real property held for sale isn't inventory in the first place, then aren't we free to employ the DMSH just as we would with improvements made to any other type of real estate?
And finally, in the case of a house flipper or other dealer in real estate, whose product apparently isn't "inventory", how do we report the cost of the sale? Would Form 1125-A or Part III of Schedule C be used in the same way, with a beginning and ending "inventory"?