Deduct Housing Code Fines

[Kyle Meyers]

I invest in tax liens and recently received a notice that one of the properties I have a lien on is in violation of the housing code and fines and penalties may begin being assessed next month if the corrections are not made.

Because I am not the owner, I cannot make the corrections the city has demanded. I do not believe the current owner will be making these corrections either as it appears they have abandoned the property sometime in the last few months. I have reached out to the inspector to see if I can get the deadlines extended because of the situation, but have not heard anything back yet.

My question is about the income tax aspects of the potential fines and penalties that may be assessed. The tax law disallows deductions for any fines and penalties, however I was wondering if that applies in this situation because the fines are not directly being assessed to me. The penalties would be a lien on the property and I would likely be paying them with the subsequent property tax payments throughout this year before filing for a tax deed. Would I add the amounts I pay to the basis and depreciate over the life of the property?