Property not "in service" in '16. Can I expense taxes & interest?

Question

I know that this can be done but not sure how how to do it. I want to write off property taxes and mortgage interest paid for property purchased in 11/16. Its still undergoing a rehab so its not "rent ready" yet. I know that the rehab expenses are added to the basis once it becomes rent ready but what about property taxes, mortgage interest, and utilities paid in 2016? Thanks!

Jim Kennedy · Answer

You can write off taxes and interest for a second home just like your primary residence, but it has to be a second home - like a vacation home. You are limited to interest on a million dollars of mortgage indebtedness and $100K of lines of credit against them.

Oh snap, I just re-read your post and it appears these are rentals. Please disregard my comments in the previous paragraph. While the facts I stated are correct under the Internal Revenue Code, your rental does not seem to be eligible under your facts and circumstances.

Jim Kennedy, CPA

Steven Hamilton II · Answer

Mr Kennedy is a good CPA from what I've read.

Much of this comes to strategy. You have to be strategic but within the law.

From the IRS Publications:

Deducting vs. capitalizing costs. Do not add to your basis costs you can deduct as current expenses. However, there are certain costs you can choose either to deduct or to capitalize. If you capitalize these costs, include them in your basis. If you deduct them, do not include them in your basis. The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Pub. 535, chapter 7.If its own personally I'd take the taxes on Schedule A for investment property taxes etc.   And the interest can be included for purposes of investment interest; however, there it is limited to investment income.

Steven Hamilton II · Answer

Bart on a flip they are capitalized; however, there is an election you can make to deduct the property taxes in the current year.

Rick Jones · Answer

This is when I get confused. 2 other CPAs just said I can't deduct it and another says I can. Can I get some clarification on this please?

Steven Hamilton II · Answer

You are allowed to write of your property taxes on Schedule A and your interest as investment interest. Not as interest for a second home. The rehab, utilities etc are all capitalized and should be depreciated accordingly.

Rick Jones · Answer

In PA at least, at closing the seller is reimbursed for taxes paid extending into the next year so it's more then just the 2 months. Also interest paid is to a private lender with a relatively high rate, but still a couple thousand. I suppose your right though, nothing to worry too much about. First time doing taxes on my own since getting into RE. Guy doing them before was screwing them up for years I come to find so just want to make certain I'm doing everything right!

Nicholas W. · Answer

No, if I read correctly it was stated earlier in this post that they will be added to the basis of the property and depreciated just like all other make ready costs prior to a property being put in service.

If you purchased the property in November are we really talking about any significant sums of money? I would think the property taxes and mortgage interest would only add up to a few hundred, maybe a thousand dollars. I realize every little bit helps, but this doesn't seem like something to sweat too much.

Rick Jones · Answer

Would this apply to me? Based on this I would have to make a special election to capitalize property taxes, interest, carrying costs for 2016 and would depreciate them with the property once in service in 2017.

"Reg §1.266-1(b)(1)(i) provides that a taxpayer which owns unimproved and unproductive real estate can elect to capitalize annual taxes, interest on a mortgage, and other carrying charges. The election must be made annually. The election requires a statement in the taxpayer's return setting forth the description of the property and the expenses to which the election applies. In addition, if the property produces income in a given year, the election is not available"

http://www.law.cornell.edu/uscode/text/26/163

Rick Jones · Answer

So the property taxes paid for this property in 2016 that I bought specifically for use as a rental property/business use is not deductable in anyway? Something just doesn't sound right about this. Can anyone provide documentation supporting this claim?

Property not "in service" in '16. Can I expense taxes & interest?

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