Tax and Expenses Allocation for Land

[Clay W.]

I self-prepare my annual tax returns and have a tax scenario/question regarding the allocation of Property Taxes and Carry Expenses for land.

In 2022, I purchased a vacant parcel of land that is zoned for multi-family development. The site is located in a suburban area and previously had a building on it that was scraped years ago. In short, there is infrastructure (sidewalks, etc) so this is partially improved land. My plan is to eventually develop "for-rent" apartments as an investment. I do not own the lot within a LLC or other corporate structure.

Given that this acquisition is for investment purposes (not for personal use, future second home, etc), I am trying to confirm exactly how I should allocate my incurred expenses (i.e. mortgage loan interest, land surveyor services, ongoing property taxes, architect consulting fees, security fencing, etc) on my tax returns. I have other existing residential rental properties that I account my expenses for on my Schedule E, but those are going-concern properties.

My initial thought was that I should capitalize all my expenses related to the lot (thus increasing my overall land basis) until the time that the property is delivered and begins service as a rental. However, I've also read conflicting information that the mortgage interest and property taxes should not be capitalized and that I should allocate those within my personal itemized deductions, however, I will receive no benefit for these expenses since I am capped at $10,000 SALT.

Many thanks for your feedback.