What is the tax treatment of inventory valuation related to real estate?
In real estate, once a property is being developed or held for resale it will generally be classified as inventory. It is important that inventory is valued properly as it can have a significant impact on net income year to year.
Real property can be valued at the lower of cost or market value. The method used in valuing a corporation’s inventory must be consistently applied year to year. There must be an acceptable reason for changing methods and it must be acknowledged by Canada Revenue Agency (CRA).
It is usually more favorable to value inventory at cost in real estate as prices do generally increase. Once construction is complete and a property is sold, the inventory cost is transferred to cost of goods sold.
There are situations where a corporation may be required to write down their inventory value to fair market value. It is CRA’s position that if the property increases its value by any amount in the future up to the original cost, the increase must be recorded in the same tax year. The lower of cost or market valuation must be done every year.
The net realizable value is a common term used for valuation of inventory and it is net value of the inventory if it were sold (selling price less selling costs).
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