Question

How do I make an election in Section 266 to capitalize the taxes paid to the basis of vacant property?

Forum|Forum|4 years ago
March 19, 2022
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Can loan interest on vacant land be capitalized?

TurboTax Premier Online

Just add the taxes and interest to the basis of the property.

Taxes and carrying charges.

(1) The taxpayer may elect, as provided in paragraph (c) of this section, to treat the items enumerated in this subparagraph which are otherwise expressly deductible under the provisions of Subtitle A of the Code as chargeable to capital account either as a component of original cost or other basis, for the purposes of section 1012, or as an adjustment to basis, for the purposes of section 1016(a)(1). The items thus chargeable to capital account are:

(i) In the case of unimproved and unproductive real property: Annual taxes, interest on a mortgage, and other carrying charges.

(ii) In the case of real property, whether improved or unimproved and whether productive or unproductive:

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds),

(b) Taxes of the owner of such real property measured by compensation paid to his employees,

(c) Taxes of such owner imposed on the purchase of materials, or on the storage, use, or other consumption of materials, and

(d) Other necessary expenditures,

paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property, up to the time the development or construction work has been completed. The development or construction work with respect to which such items are incurred may relate to unimproved and unproductive real estate whether the construction work will make the property productive of income subject to tax (as in the case of a factory) or not (as in the case of a personal residence), or may relate to property already improved or productive (as in the case of a plant addition or improvement, such as the construction of another floor on a factory or the installation of insulation therein).

(iii) In the case of personal property:

(a) Taxes of an employer measured by compensation for services rendered in transporting machinery or other fixed assets to the plant or installing them therein,

(b) Interest on a loan to purchase such property or to pay for transporting or installing the same, and

(c) Taxes of the owner thereof imposed on the purchase of such property or on the storage, use, or other consumption of such property,

paid or incurred up to the date of installation or the date when such property is first put into use by the taxpayer, whichever date is later.

(iv) Any other taxes and carrying charges with respect to property, otherwise deductible, which in the opinion of the Commissioner are, under sound accounting principles, chargeable to capital account.

Capitalization

Critter-3

IRC Section 266
Election To Capitalize Carrying Charges
Overview
Generally, taxpayers are permitted a deduction for amounts paid or accrued for
taxes, interest and other carrying charges. However, §266 provides taxpayers
with the option of capitalizing costs that would otherwise be deductible. Reg.
§1.266-1(b)(1) outlines the following categories of costs which at the taxpayers
election are chargeable to capital accounts either as a component of original
cost or other basis:
i. Costs related to unimproved and unproductive real property. Costs which
may be capitalized are annual taxes, interest on a mortgage, and other
carrying charges. Delay rentals, which are payments made by a lessee for
the option to defer the commencement of drilling operations under an oil,
gas, and mineral lease, may be capitalized as carrying charges under this
provision. An election under this provision is effective only for the year for
which it is made.
ii. Costs related to real property, whether improved or unimproved and whether
productive or unproductive. Costs which may be capitalized are interest on a
loan, payroll taxes paid by the owner of such real property, taxes imposed on
the purchase of materials, or on the storage, use or other consumption of
materials, and other necessary expenditures. An election under this
provision is effective until the development or construction work in that
subdivision has been completed.
iii. Costs related to personal property. Costs which may be capitalized are
payroll taxes for transporting machinery or other fixed assets to the plant or
installing them, interest on a loan to purchase such property or pay for
transporting or installing the same, and taxes paid on the purchase of such
property or on the storage, use, or other consumption of such property paid
or incurred up to the date of installation or the date when such property is first
put into use by the taxpayer, whichever date is later. An election made this
provision is effective until the later of either the date of installation of the
property described in that subdivision, or the date when such property is first
put into use by such taxpayer.
iv. Costs related to other taxes and carrying charges. Costs which may be
capitalized are any other taxes and carrying charges with respect to property,
otherwise deductible, which in the opinion of the Commissioner are, under
sound accounting principles, chargeable to a capital account. An election
made with respect to other taxes and carrying charges is effective as
determined by the Commissioner.

If in any taxable year there are two or more items from the above stated
categories which relate to the same project, the taxpayer may elect to capitalize
any one or more of such items even though he does not elect to capitalize items
of the same type relating to other projects. However, if expenditures for several
items of the same category (e.g., more than one type of taxes) are incurred with
respect to a single project, the election to capitalize must, if exercised, be
exercised as to all items of that category.

A taxpayer must closely examine the capitalization of costs required in other
Code sections such as §263A before electing to capitalize carrying charges
under §266. PLR 9132001 provides an example of where a §266 election was
held invalid by the IRS in a technical advice memorandum because the intent of
the election was in conflict with capitalization requirements of §263A

When to File
The election is made by attaching a statement to the tax return for the taxable
year in which the election is to be effective. The election must be made no later
than the due date, including extensions, of the taxpayer's return for such year.
Where to File
The election statement is attached to taxpayers income tax return filed within the
required time periods and mailed to the designated Internal Revenue Service
Center.

https://eformrs.com/Forms09/FedPdf09/SEC266.pdf

This is NOT in the TT program ... an election statement must be attached to a MAILED in return that is timely filed ... You could efile the return then attach the statement to a timely filed amended return posted by 4/18/22.

T

TaxHelp222

Due to the fact that the current SALT cap is $10K, effectively making property taxes not deductible for many people who lives in states with state income taxes, can you add your property taxes to the basis of your primary residence?

What if you rent part if it?