Discussion:Real Estate Investment
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Discussion Forum Index --> Consumer Questions --> Real Estate Investment
| January 3, 2006 | |
| Question: Retired taxpayer held an investment in real estate for several years. Property was a vacant residence that produced no annual income (but lots of expense). He never lived on the property. Investment was subsequently sold for a gain (mostly due to market appreciation in recent years). Taxpayer had insufficient other taxable income to benefit from itemizing during the investment holding period. Some expenses can be associated with identifiable capital improvements that adjust the basis. But what about the other carrying costs, such as property taxes (which were significant), yard maintenance, utilities, etc.? Is all "benefit" of these expenses lost because taxpayer could not itemize during the holding period? Any thoughts appreciated. | |
| 3 January 2006 | |
| I think they are all lost, no way to say they were capital expenditures. Long term capital gain. | |
DesignatedCritic (talk|edits) said: | 3 January 2006 |
| Property taxes paid at closing could be expenses of the sale. Also, cleanup just prior to the listing to make the property more saleable could be expenses of the sale. | |
| 3 January 2006 | |
| You can elect to capitalize carrying charges that normally would be deductible, normally used when the taxpayer does not itemize. See IRC 266 and related TRegs. A taxpayer may elect to capitalize interest, taxes, and other deductible carrying charges, such as capital improvements, with respect to property. The capitalized costs increase the property's basis, thereby reducing the gain upon the eventual sale of the property. The election does not apply to items that are not otherwise deductible. (From PPC 1040 Deskbook).
However, it may be too late for your client if a specific election was not attached to the original return. Per PPC, presumably, this is the due date of the return including extensions, although the regulations do not specifically state this. If you didn't use this election, you may want to see if you can correct by amending the returns of any open years and see if that works (PPC is not always right). I'd check the TRegs under IRC 266 and see if you find something that may help. It's not too late to do an election with the 2005 tax return for the 2005 expenses. The election is made by attaching a statement to the tax return which says "taxpayer elects pursuant to IRC Sec. 266 to capitalize, rather than to deduct, the following carrying costs incurred with respect to [describe property] located at [insert address]." Then list & describe the costs. But generally, both Kpeworch and DesignatedCritic are correct. | |
| 5 January 2006 | |
| Dear RLMCPA,
Thank you very much for your informative response to my question about expense treatment for real estate investments (IRC Sec. 266, etc.) I do, now, recall the election to capitalize as you mentioned. In fact, I found similar language in Publication 535, chapter 8. However, I thought (perhaps mistakenly) that applied to a "business or trade" as opposed to an individual investor. Is it possible, to your knowledge, that there may be separate rules applicable to a one-time casual investment? It is a shame in this instance because these non-capital expenses amount to almost half the taxpayers gain. Thanks again! PS - could you refer me to any literature that more precisely defines what the IRS considers a "capital improvement" that does adjust basis? In reading the various publications, the definition seems rather subjective in practical application. | |
| 6 January 2006 | |
| I think what I read referred to IRC 263A for a definition of capital improvements. PPC also said: Expenses for "Unimproved and Nonproductive Real Property" include mortgage interest, property taxes, and other true carrying charges.
Expenses for all Real Property includes expenses incurred in development of the property or in construction of improvements up to the time the development or construction is completed can be capitalized. However, capitalization of many of these items may be required under other Code sections (e.g., IRC Sec. 263A ). Eligible expenses include interest, taxes, and other necessary expenses incurred in either the development or construction phase. The election applies to the development or construction of a taxpayer's personal residence as well as commercial property. Hope this helps. | |
| 7 January 2006 | |
| Hi, did the retired person ever attempt to rent the proeprty thru advertising the property for rent in newspaper and other forms of media. If an attempt was honestly made there is a possible solution which may allow the retired person that ability deduct those expenses in question. | |
| 7 January 2006 | |
| In response to Lee13, I like where you're going this argument. However, to support that argument, the client should have been filing Schedule Es for the years he held it, continuing to claim it as an unproductive rental property. From the facts presented by Blubby, I don't think this was the case. To take this approach now might be construed to make the facts fit an already bad situation. Just a caution...I agree that Lee13's idea will work for a different fact pattern than what Blubby presented here. | |
| January 7, 2006 | |
| I just read Sec. 263A. I may be completely confused, but the section appears to say that if a taxpayer acquires an asset solely with the intention of resale for profit (not a personal use asset), the taxpayer is REQUIRED to capitalize all direct and indirect costs ("including taxes") of that asset. Also, this capitalization requirement covers assets "produced" by the taxpayer, which is defined in 263A(g)(1) as including "improvements" to the asset. I don't believe that it must be a trade or business for these rules to apply, only that it be an activity engaged in for profit. Have I totally missed something here?
Since this residence was acquired and renovated with the sole intention of resale for profit and was not a personal-use asset nor income producing, why wouldn't the UNICAP rules of Sec. 263A apply so that all costs incurred could be capitalized and used to adjust the basis? As to Lee13's question, the property was being renovated by the owner so couldn't be rented during the holding period. | |
| January 7, 2006 | |
| Further to my last point, the source of my confusion is this: As noted by RLMCPA in her first entry, Pub. 535 Chapter 8 (Business Expenses) says that capitalization of carrying costs is ALLOWED IF elected in the year incurred, BUT Sec. 263A (UNICAP) REQUIRES capitalization of indirect costs (including taxes). So: (1) given the facts, wouldn't Sec. 263A apply here since this investment was not a "business" but rather a singular asset held and renovated solely for resale? And (2), why the apparent discrepancy in treatments in the IRS literature? Shouldn't Pub. 535 reflect the UNICAP rules for "indirect costs" requiring capitalization rather than just allowing it?
I'm sure tangled up in my shorts here, aren't I :^) | |
| January 10, 2006 | |
| No, I was referring to 263A.
In particular, see 263A(a)(2)(B) and 263A(b) Sec. 263A. Capitalization and inclusion in inventory costs of certain expenses | |
| 19 May 2006 | |
| Are you saying that if a personal sells several properties on short term basis I could take profits and losses on Schedule C instead of Schedule D | |
| 13 July 2006 | |
| Hi, I'm a very new real estate investor and I want to do things the right way in the beginning. It seems to me that the best thign to do is to put my properties into an LLC? One questions I do also have is...is there any way to transfer the properties (and mortgages) and not have the mortgages in my name anymore? I'm sure there is a way where a partnership or somethign can have them. What are your thoughts?
Thank you for all of your help! | |
| 13 July 2006 | |
| So, what is the answer? Can a buyer of improved residential real estate capitalize interest expense and property taxes? Buyer will not rent it, therefore it will not be a passive activity. Buyer plans to hold for 12 months while further improving the property, then sell it. In one research tool I looked at the election under Reg 1.266-1(b)(1) to capitalize interest and taxes spoke only about being able to do this on VACANT LAND.
A solid answer would be appreciated. Also, any other Reg that might address this would also be appreciated. | |
| July 13, 2006 | |
| There was another thread yesterday or day before on this, Deaner, and the answer was that the interest must be capitalized until it's finished, then the interest is deductible. Taxes are always deductible it seems.
Chris, yes, RE into LLC's is what we're doing these days, don't know that it's difficult to transfer the mortgages. You'll be responsible for them anyway, as a personal guarantor, so nothing changes there... | |
