In the "Are You Kidding" Department

I’m all about tax deductions. In fact, I’d be the first to admit that I love pushing the boundaries of what’s considered “ordinary and necessary” in the ordinary course of business.

But this case caught my eye. While I think it was a nice try, I’m not really that surprised the IRS said “I don’t think so.”

In what can best be characterized as a “hopeful” move, a residential home builder attempted to claim that the mortgage loan he took out to buy some vacant land on which to build was a tax-deductible business expense.

As far as the builder was concerned, buying the land was just the same as buying the lumber to construct the homes. In his eyes the land purchase was an ordinary and necessary business expense to the furtherance of his business - which was building residential properties.

Sadly (although unsurprisingly), the IRS didn’t see things in quite the same light. They said that the funds the builder borrowed to buy the land had created a tax basis in that land. So, when the homes were built and subsequently sold, the builder would then receive the tax benefit for purchasing the land. The IRS went on to say that the repayment of the mortgage loan principal was a completely separate transaction from the purchase and sale of the building lots, and so there was no expense to set off against the mortgage loan transaction in the first place. The only thing that was happening was that the builder was returning borrowed money to the lender, which did not create a deductible business expense.