Discussion:Property Taxes and Capital Gains
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HelplessTP (talk|edits) said: | 20 February 2006 |
| Assume that an individual taxpayer owns a vacant house as an investment, and fixes it up with the intent to resell, and this process takes a couple of years. Why can't the taxpayer reduce his capital gain for all the property taxes paid during the holding period if the investment produced no income during that time? Thank you for your answers. | |
| 20 February 2006 | |
| If the taxpayer is in the trade or business of reselling homes, then the taxes must be capitalized.
If the taxpayer is merely holding property for investment, then he can make an election under Sec. 266 to capitalize the taxes. This election must be filed with the original return. | |
HelplessTP (talk|edits) said: | 20 February 2006 |
| So, if the taxpayer didn't know, in advance, that an election must be made at the beginning (which probably few non-professionals would know), then the taxpayer looses out entirely? I've paid out a HUGE sum in property taxes over the last few years and I can't even recover my capital without paying taxes on it a second time? I thought "ignorance was bliss"? I wonder why the IRS requires capitalization for a business and forbids it for individuals (without an up-front election)? All too confusing and unfair for a guy like me to understand. Thanks for the info, Riley2. | |
| 20 February 2006 | |
| Congress introduced the Internal Revenue Code ยง 263A unicap rules in 1986 as a means to force businesses into matching their revenues with the associated costs of generating those revenues.
If your activity rises to the level of a trade or business by virtue of its regularity and continuity, then the taxes would also be capitalized. However, the gains from the sale of such property would be ordinary income. | |
HelplessTP (talk|edits) said: | 21 February 2006 |
| Matching revenues and expenses is about as fundimental a concept as there is, and my main gripe is that I should be allowed to do so: Those property taxes arose from the ownership of specific asset, and should be offset against the revenues that specific asset produced. But because of obscure rules, the IRS is not permitting me to match those revenues & expenses as they should. As a result, my taxable capital gain is hugely overstated relative to my true economic gain, and I'll be paying taxes on the recovery of capital, not income. How unfair is that! It's simply regulated double-taxation. | |
| 21 February 2006 | |
| 1. Haven't you been deducting the property tax on your Form 1040 Schedule A all along?
2. Taxes, like life, are unfair in many, many ways. Double taxation used to be at least partially taboo (remember when sales taxes could be deducted by anyone who itemized?), but not any more. They tax it when you earn it, they tax it when you spend it, they tax it when you save it, and they tax it when you die. Whining on TaxAlmanac won't get you anywhere. Write your elected representatives in Congress. | |
HelplessTP (talk|edits) said: | 21 February 2006 |
| Okay, given that any tax benefit of those huge property tax payments are forever lost, what about all the other prior-year's expenses I incurred in fixing up the house for sale? I know that specifically identifiable capital improvements are basis adjustments, such as the new central A/C that I had installed and the new appliances, but what about the rest of the $s? For example, there was a lot of materials cost (lumber, paint, plaster, stucco, etc.) and contractors' cost for misc repairs, etc. (no interest). Are they lost also, just like the property taxes? | |
| 21 February 2006 | |
| The fixing up costs are capitalized and are part of your cost basis. If you haven't previously deducted the property taxes, I would also consider them part of the cost basis even if you hadn't made the election. If audited, I would make the argument that by not previouly deducting the property taxes you had effectively made the election to capitalize. You might not win that argument, but I would go that route before losing the deduction altogether. | |
