Discussion:Timing of capital expense as medical deduction

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Discussion Forum Index --> Advanced Tax Questions --> Timing of capital expense as medical deduction

Discussion Forum Index --> Tax Questions --> Timing of capital expense as medical deduction

Lukepccpa (talk|edits) said:

20 February 2011
I have a client whose spouse has advanced MS. They live in an old two story farmhouse, so he is adding a bedroom & bathroom to the house at ground level for her as getting up the stairs is increasingly difficult and the installing a lift or elevator is not feasible.

I'm comfortable with taking the deduction, and I am aware of rules and the increase in FMV offset. My question is the construction started in 2010 and won't be completed until 2011, so when should I claim the deduction? Logic would indicate that I hold all 2010 expenses until 2011 when the construction is completed and deduct the allowable expenses in 2011 after doing the FMV increase calculation.

Any thoughts?

DaveFogel (talk|edits) said:

20 February 2011
From Elwood v. Commissioner, 72 T.C. 264 (1979):

"Where a taxpayer acquires some medically necessary asset, the deduction allowed with respect thereto is not taken over the assets' useful life as would be the case with depreciation, but rather is taken in full in the year of acquisition. Sec. 1.213-1(e)(1)(iii), Income Tax Regs. See, e.g., Riach v. Frank, 302 F.2d 374 (9th Cir. 1962); Oliver v. Commissioner, 364 F.2d 575 (8th Cir. 1966); Hollander v. Commissioner, 219 F.2d 934 (3d Cir. 1955); Gerard v. Commissioner, 37 T.C. 826 (1962)." [emphasis added]

Therefore, it seems that you would hold the expenses until 2011 when the construction is completed. This makes sense, too, because it isn't until the construction is completed that you can determine the increased FMV of the property.

Ckenefick (talk|edits) said:

20 February 2011
This is a really tough one. Dave cites cases, but Sec 213 specifically says they're deductible when paid. And, as Dave points out, it does make sense that we'd defer the deduction because we won't know what the property's increased FMV is until such improvements are complete. However, if the position is taken that they're deductible "when paid," a logical conclusion would be that if the entire increase in FMV occurs in Year 2, when the improvements are complete, then this increase may invoke the Sec 213 language "not compensated by insurance or otherwise." Perhaps the increase in FMV is an "or otherwise" type of compensation/reimbursement.

The reason this whole issue is important is because if you forego the deduction in Year 1 and claim it all in Year 2, the IRS could later come forward after the SOL passes on Year 1 and say "Sorry taxpayer, you should have claimed part of this deduction in Year 1."

But at the same time, in agreeing with Dave, can a half-finished improvement really be of any value to the taxpayer in this situation? If not, then perhaps the deduction "springs" into behind once the improvement are available for use (but now we're getting into placed-in-service issues which only pertain to depreciation deductions, which is what we are not dealing with here).

The reg Dave cites uses the word "expenditure" whereas Sec 213(a) uses the word "expenses." I think this was intentional, to differentiate between a capital expenditure and an expense. Given this, I think this weighs in Dave's favor.

DaveFogel (talk|edits) said:

20 February 2011
If you're concerned that the IRS might disallow part of the 2011 deduction after the 2010 statute of limitations has expired on the grounds that the improvements were paid in 2010, then before the expiration of the 2010 statute, file a protective claim, then you'll be covered.

Lukepccpa (talk|edits) said:

20 February 2011
Thanks for the advice! I'm going to hold the expenses until 2011.

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