When you build a spec home you are creating an asset that will be sold to another person.

Spec homes are built in anticipation of a sale; therefore, a construction contract does not exist. You do not use the rules for home construction contracts, which are contracts to build a home with four or fewer residential units.

When you build a spec home all the direct and indirect costs are accumulated.

These costs are called the basis of the property and cannot be deducted until the home is sold. The costs that must be included in the basis of the home are:

• Land
• Materials
• Labor, and
• Allocated indirect costs (See table of indirect costs)

Thus, the income is reported and the basis deducted in the year the home is sold.