I should note that the following has nothing to do with me, and it does not even have any practical importance. That is, I am not really seeking advice. (If I were, of course I should expect to pay for it, especially in this case, where a lot of money is at stake.) But it is based on something that I read about and piqued my curiosity.
Are legal costs incurred while seeking a permit to build on newly-purchased land added to the basis of the property, even if the permit is eventually denied?
If so, how much of the building contractor's costs can also add to the basis of the property if the permit is eventually denied? Just the costs incurred to try to justify the permit; or also the architect's costs incurred as part of the building process, which of course must be completed before requesting a permit to build?
If the permit were eventually granted, I would think that those costs are simply added to the cost to build, which "obviously" becomes part of the basis. Right?
But if the permit is denied, those costs were not part of the cost of acquiring the land. On the other hand, the land was purchased with the primary (if not sole) intent of building on it; an architect was hired within 12 months after purchasing the land. I don't know if that makes any difference.
At issue is: the permit approval process has taken more than two years; in fact, it still is not resolved. It was initially denied; an attorney was hired, the decision was appealed, and the permit was granted on appeal; then some committee members(!) filed an appeal to put the grant aside and rehear the permit request before the full council.
At this point, there is at least a 50% chance that the permit will be denied once again and finally.
In the meantime, the permit process has cost the owners between 2.5% and 5% of the cost of the property -- a significant amount.
(Arguably, they might seek to recover some of that cost through litiagation. But that's a legal matter, unrelated to the tax issue I am asking about here. And I am getting ahead of myself.)