Capitalization of Interest

We follow the practice of capitalizing interest to inventories owned during the period of development and to investments in unconsolidated homebuilding and land development joint ventures in accordance with ASC Topic

835,

Interest

("ASC

835"

). Homebuilding interest capitalized as a cost of inventories owned is included in cost of sales as related units or lots are sold. Interest capitalized to investments in unconsolidated homebuilding and land development joint ventures is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to

third

parties. Interest capitalized to investments in unconsolidated land development joint ventures is transferred to inventories owned if the underlying lots are purchased by us. To the extent our debt exceeds our qualified assets as defined in ASC

835,

we expense a portion of the interest incurred by us. Qualified assets represent communities that are actively selling or under development as well as investments in homebuilding and land development unconsolidated joint ventures. During the

nine

months ended

September 30, 2017

and

2016,

our qualified assets exceeded our debt, and as a result, all of our homebuilding interest incurred during these periods was capitalized in accordance with ASC

835.

The following is a summary of homebuilding interest capitalized to inventories owned and investments in unconsolidated joint ventures, amortized to cost of sales and income (loss) from unconsolidated joint ventures and expensed as interest expense, for the

three

and

nine

months ended

September 30, 2017

and

2016:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)

Total interest incurred (1)	$	52,972		$	56,872		$	156,845		$	175,207
Less: Interest capitalized to inventories owned (1)		(52,158	)		(55,761	)		(154,371	)		(172,170	)
Less: Interest capitalized to investments in unconsolidated joint ventures		(814	)		(1,111	)		(2,474	)		(3,037	)
Interest expense	$	—		$	—		$	—		$	—

Interest previously capitalized to inventories owned, included in cost of home sales	$	48,912		$	44,636		$	140,687		$	115,367
Interest previously capitalized to inventories owned, included in cost of land sales	$	—		$	115		$	—		$	1,596
Interest previously capitalized to investments in unconsolidated joint ventures, included in income (loss) from unconsolidated joint ventures	$	5		$	613		$	13		$	613
Interest capitalized in ending inventories owned (2)	$	379,884		$	362,807		$	379,884		$	362,807
Interest capitalized as a percentage of inventories owned		5.5	%		5.6	%		5.5	%		5.6	%
Interest capitalized in ending investments in unconsolidated joint ventures (2)	$	5,324		$	3,224		$	5,324		$	3,224
Interest capitalized as a percentage of investments in unconsolidated joint ventures		4.1	%		2.3	%		4.1	%		2.3	%

(

)

Total interest incurred and interest capitalized to in

ventories owned during the

nine

months ended

September 30, 2016

includes a

million increase related to the valuation of the

1.625%

convertible senior notes that was completed during the

2016

first

quarter.

(

)

During the

three

and

nine

months ended

September 30, 2017,

in connection with lot purchases from our joint ventures,

and

$0.5

million, respectively, of capitalized interest was transferred from investments in unconsolidated joint ventures to inventories owned.