Can you put the real estate taxes on your schedule A while the property is undergoing renovations, before the property is placed in-service? I was under the impression that you cannot, that they must be added to the basis, but then I found this post from @Steven Hamilton II:
https://www.biggerpockets.com/forums/51/topics/42509-deducting-rehab-costs
Are there any other exceptions to this "rule" that you must capitalize all costs during the rehab? Was this real estate tax thing true before and after the Tax Cuts Jobs Act?
I saw your other post and know you're in a difficult spot due to coronavirus, and therefore you are attempting to get your return filed as soon as possible to get a refund.
You have my sympathy, but respectfully, in your posts, in which you're soliciting advice that you're obviously going to rely upon to DIY your return, you appear to be quickly trying to jam a square peg into round hole so you can move onto the next peg.
You're not really getting an understanding of what you're doing and its obvious you're relying on incorrect information half of the time, which as a professional is a little cringey for me to observe.
I hope you figure out a well-reasoned way forward. Amended returns a year or two down the road are often more expensive than just hiring someone to do it right the first time. As you're putting a property into service, this year's return easily affects future year's returns.
Best wishes and best of luck.
I would think those taxes go on schedule E unless they are on your personal home.
Can you put the real estate taxes on your schedule A while the property is undergoing renovations, before the property is placed in-service? I was under the impression that you cannot, that they must be added to the basis, but then I found this post from @Steven Hamilton II:
https://www.biggerpockets.com/forums/51/topics/42509-deducting-rehab-costs
Are there any other exceptions to this "rule" that you must capitalize all costs during the rehab? Was this real estate tax thing true before and after the Tax Cuts Jobs Act?
It still applies before an after TCJA. Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes.
Technically you have to elect to capitalize them if you want to do so. (election under section 266) You can also review Publication 535 page 24
Here is a good read on the topic:
https://www.currentfederaltaxdevelopments.com/blog/2019/9/28/do-taxes-on-investment-real-estate-escape-the-10000-cap-it-seems-likely
"Carrying Charges
Carrying charges include the taxes and interest
you pay to carry or develop real property or to
carry, transport, or install personal property.
Certain carrying charges must be capitalized
under the uniform capitalization rules. (For information on capitalization of interest, see chapter 4.) You can elect to capitalize carrying
charges not subject to the uniform capitalization
rules, but only if they are otherwise deductible.
You can elect to capitalize carrying charges
separately for each project you have and for
each type of carrying charge. Your election is
good for only 1 year for unimproved and unproductive real property. You must decide whether
to capitalize carrying charges each year the
property remains unimproved and unproductive. For other real property, your election to
capitalize carrying charges remains in effect until construction or development is completed.
For personal property, your election is effective
until the date you install or first use it, whichever
is later.
How to make the election. To make the election to capitalize a carrying charge, attach a
statement to your original tax return for the year
the election is to be effective indicating which
charges you are electing to capitalize. However,
if you timely filed your return for the year without
making the election, you can still make the election by filing an amended return within 6 months
of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section
301.9100-2” on the statement. File the amended return at the same address you filed the
original return."
Thank you.
If you buy a prop in Jan and put in service in july can you put the half on sched A and half on sched E if RE taxes are 12k, to avoid 10k limit?
If rehab is 2 years, can you elect to do this in the second year if you missed the first?
If you never filed a return, when you file a year late are you out of luck?
Last question on this, besides RE taxes, any other common expenses this applies to? Would these additional items, if they exist, go on sched A, c, or E?
Can you put the real estate taxes on your schedule A while the property is undergoing renovations, before the property is placed in-service? I was under the impression that you cannot, that they must be added to the basis, but then I found this post from @Steven Hamilton II:
[Steven] It still applies before an after TCJA. Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes.
Technically you have to elect to capitalize them if you want to do so. (election under section 266)
Steven, here's your 5-yr old quote from that thread: "DO keep in mind you can treat property taxes paid on the rental as a deduction on your Schedule A. Interest MAY be a deduction on Form 4952"
If we're talking about Sec. 212 investment / income-producing property - then no debate. But you seem to take a position that taxes paid for a rental property, and specifically taxes paid prior to it placed in service, are deductible on Schedule A. I wonder how you came to this conclusion.
I'm also confused about your last sentence stating that you have to elect to capitalize them under Sec. 266 "to do so." What do you mean? To do what?
"Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes."
Perhaps you meant not subject to the $10k SALT limit?
Take a read through IRC Sec. 164(b)(6). Particularly the part The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212.
Sec. 212 property taxes are not subject to the SALT cap, and should be taken on Schedule A, line 6 as an itemized deduction or capitalized under a 266 election, assuming a non-rental 212 activity. If a rental real estate 212 activity, they go on Schedule E.
I saw your other post and know you're in a difficult spot due to coronavirus, and therefore you are attempting to get your return filed as soon as possible to get a refund.
You have my sympathy, but respectfully, in your posts, in which you're soliciting advice that you're obviously going to rely upon to DIY your return, you appear to be quickly trying to jam a square peg into round hole so you can move onto the next peg.
You're not really getting an understanding of what you're doing and its obvious you're relying on incorrect information half of the time, which as a professional is a little cringey for me to observe.
I hope you figure out a well-reasoned way forward. Amended returns a year or two down the road are often more expensive than just hiring someone to do it right the first time. As you're putting a property into service, this year's return easily affects future year's returns.
Best wishes and best of luck.
Can you put the real estate taxes on your schedule A while the property is undergoing renovations, before the property is placed in-service? I was under the impression that you cannot, that they must be added to the basis, but then I found this post from @Steven Hamilton II:
https://www.biggerpockets.com/forums/51/topics/42509-deducting-rehab-costs
Are there any other exceptions to this "rule" that you must capitalize all costs during the rehab? Was this real estate tax thing true before and after the Tax Cuts Jobs Act?
It still applies before an after TCJA. Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes.
Technically you have to elect to capitalize them if you want to do so. (election under section 266) You can also review Publication 535 page 24
Here is a good read on the topic:
https://www.currentfederaltaxdevelopments.com/blog/2019/9/28/do-taxes-on-investment-real-estate-escape-the-10000-cap-it-seems-likely
"Carrying Charges
Carrying charges include the taxes and interest
you pay to carry or develop real property or to
carry, transport, or install personal property.
Certain carrying charges must be capitalized
under the uniform capitalization rules. (For information on capitalization of interest, see chapter 4.) You can elect to capitalize carrying
charges not subject to the uniform capitalization
rules, but only if they are otherwise deductible.
You can elect to capitalize carrying charges
separately for each project you have and for
each type of carrying charge. Your election is
good for only 1 year for unimproved and unproductive real property. You must decide whether
to capitalize carrying charges each year the
property remains unimproved and unproductive. For other real property, your election to
capitalize carrying charges remains in effect until construction or development is completed.
For personal property, your election is effective
until the date you install or first use it, whichever
is later.
How to make the election. To make the election to capitalize a carrying charge, attach a
statement to your original tax return for the year
the election is to be effective indicating which
charges you are electing to capitalize. However,
if you timely filed your return for the year without
making the election, you can still make the election by filing an amended return within 6 months
of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section
301.9100-2” on the statement. File the amended return at the same address you filed the
original return."
I think I misread what you were saying late last night and I was trying to respond immediately, I think I had it exactly backwards.
My understanding now is that I must deduct real estate taxes for my NOT in service rental property on schedule A, unless I had made an election to capitalize them on my original return (or within 6 months of due date on an amended return).
Is that correct?
Besides RE taxes, what other items are in this same boat, "carrying charges," that MUST be deducted the year they are made, unless elected to be capitalized? Utilities? I see no line on Schedule A for these. What schedule would you put them on if you didn't have an in-service property because you were still rehabbing as of December 31st?
And you can't do this for the mortgage interest and other loan costs, correct? They must be amortized over the life of the 30 year mortgage? That goes on 4952 or 4562? Starting in the year you got the mortgage, or is all of this added to the basis for some reason instead? Do you have to make an election here?
I saw your other post and know you're in a difficult spot due to coronavirus, and therefore you are attempting to get your return filed as soon as possible to get a refund.
You have my sympathy, but respectfully, in your posts, in which you're soliciting advice that you're obviously going to rely upon to DIY your return, you appear to be quickly trying to jam a square peg into round hole so you can move onto the next peg.
You're not really getting an understanding of what you're doing and its obvious you're relying on incorrect information half of the time, which as a professional is a little cringey for me to observe.
I hope you figure out a well-reasoned way forward. Amended returns a year or two down the road are often more expensive than just hiring someone to do it right the first time. As you're putting a property into service, this year's return easily affects future year's returns.
Best wishes and best of luck.
You know I'm getting real tired of some of the CPA's here who spend their days telling others that they aren't going to help. You come on this site and every other trade shares their knowledge and helps each other out except a selection of CPA's who come here to tell everyone they know the answer but they get paid to tell the answers so they're not going to. You go on any programming website and you never get programmers who go "ahh, yes, see, I know how to solve your problem, and this is why we get paid to program." You could have answered any of the questions I've asked on here in half the words you just wasted your time writing, including some the necessary caveats.
So if there is a "block" button on this website, you should use if for my posts. Go spend some time with your family, I'm sure they'd enjoy your company, you seem like a wonderful person. Seriously, what kind of sick person wastes their time going on websites to tell people they know the answers to their questions but aren't going to answer them, especially when you claim to have some sort of sympathy for the situation I'm in (which you clearly don't.)
In my opinion, it is not correct. I believe that you cannot deduct taxes related to rental properties on Sch A under any circumstances, and particularly not during the initial rehab period. You could do it on vacant land held for development, but not on rentals. You capitalize these taxes into basis, and no election is needed for it. It is not elective, it is mandatory.
Now, @Steven Hamilton II is a very knowledgeable colleague of mine, and I would gladly change my opinion if he convinces me otherwise. Waiting on Steven to respond to my earlier comment. Until he does defend his position, I would not rely on it.
"Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes."
Perhaps you meant not subject to the $10k SALT limit?
Take a read through IRC Sec. 164(b)(6). Particularly the part The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212.
Sec. 212 property taxes are not subject to the SALT cap, and should be taken on Schedule A, line 6 as an itemized deduction or capitalized under a 266 election, assuming a non-rental 212 activity. If a rental real estate 212 activity, they go on Schedule E.
@Eammon you're over interpreting. Is it yet part of carrying on the activity? No, it is not.
They are not 212 taxes as it is not yet carrying on production of income. That provision is to cover a rental not for profit. See IRC 164
"addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income)."
@michael plaks,
They must be currently deductible or capitalized under the 266election. You're being way conservative considering the law. It does not restrict it to vacant land in the IRC.
"Real Estates taxes of property that is purely held for investment such as vacant land or a long term rental that is not in service may continue to be deducted on Schedule A subject to the 10k limit on state and local taxes."
Perhaps you meant not subject to the $10k SALT limit?
Take a read through IRC Sec. 164(b)(6). Particularly the part The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212.
Sec. 212 property taxes are not subject to the SALT cap, and should be taken on Schedule A, line 6 as an itemized deduction or capitalized under a 266 election, assuming a non-rental 212 activity. If a rental real estate 212 activity, they go on Schedule E.
They are not 212 taxes as it is not yet carrying on production of income. That provision is to cover a rental not for profit. See IRC 164
"addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income)."
This is investment property not yet used in carrying on a trade or business therefore they fall under 164(a)(2). Could it argues they aren't subject to the 10k limit maybe; however I'd prefer to capitalize them in this situation.
Here is a great article on the topic: https://www.lindsayandbrownell...
"addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income)."
This is investment property not yet used in carrying on a trade or business therefore they fall under 164(a)(2). Could it argues they aren't subject to the 10k limit maybe; however I'd prefer to capitalize them in this situation.
Here is a great article on the topic: https://www.lindsayandbrownell...
First, the article is just some law firm blog - no more authoritative than your or mine personal opinion. And they're specifically talking about the raw land, starting the article with "If you own any vacant land for investment." And there's zero reference to what we're talking about: taxes on the rental property during the initial rehab before it's placed in service.
And returning to our debate - you quoted Sec. 164(a) but stopped your quote too early, I'd say. Let's continue reading:
...Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property...
Don't you think that this is the description of the initial rehab on a rental?
You can have a different opinion, and I'm willing to reconsider mine, but saying "you're too conservative/too aggressive" is not advancing the debate. I still want to know what makes you think that taxes paid during the initial rehab are deductible, as opposed to capitalized. And, if deductible, specifically deductible on Sch A?
Thank you for the personal insults and vitriolic pejoratives Stuart. Things like "Go spend some time with your family, I'm sure they'd enjoy your company, you seem like a wonderful person." and calling me a "sick person" really make my day. My post was polite and respectful, but frank. I can only assume you're stressed and frustrated and this is not how you interact with people normally.
Disingenuously implying that you know what's going on inside my head was the icing on the cake. Especially coming from an anonymous person on the internet who has never met me.
But you're correct. Now, I have little desire to help or interact with you.
Thank you for the personal insults and vitriolic pejoratives Stuart. Things like "Go spend some time with your family, I'm sure they'd enjoy your company, you seem like a wonderful person." and calling me a "sick person" really make my day. My post was polite and respectful, but frank. I can only assume you're stressed and frustrated and this is not how you interact with people normally.
Disingenuously implying that you know what's going on inside my head was the icing on the cake. Especially coming from an anonymous person on the internet who has never met me.
But you're correct. Now, I have little desire to help or interact with you.
Oh please. Your post was condescending and insulting, and did literally nothing to advance the discussion. Maybe you will learn something about interacting with others - everyone else refrained from personal insults and was sticking to the topic - but I have my doubts. I do appreciate the irony that you are crying over a post that when read literally was not insulting; I figured you would recognize your work. On the other hand I cannot understand what it is you think you’re accomplishing spending time on the internet making these posts. Finally, I’m not going to speculate as to whether or not you are as condescending in person as I have no basis to do so.
"addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income)."
This is investment property not yet used in carrying on a trade or business therefore they fall under 164(a)(2). Could it argues they aren't subject to the 10k limit maybe; however I'd prefer to capitalize them in this situation.
Here is a great article on the topic: https://www.lindsayandbrownell...
First, the article is just some law firm blog - no more authoritative than your or mine personal opinion. And they're specifically talking about the raw land, starting the article with "If you own any vacant land for investment." And there's zero reference to what we're talking about: taxes on the rental property during the initial rehab before it's placed in service.
And returning to our debate - you quoted Sec. 164(a) but stopped your quote too early, I'd say. Let's continue reading:
...Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property...
Don't you think that this is the description of the initial rehab on a rental?
You can have a different opinion, and I'm willing to reconsider mine, but saying "you're too conservative/too aggressive" is not advancing the debate. I still want to know what makes you think that taxes paid during the initial rehab are deductible, as opposed to capitalized. And, if deductible, specifically deductible on Sch A?
We are not talking about taxes about acquisition or disposition we are talking about taxes incurred on property that is held and it currently is not held for collection of income as it has not been placed in service.
I shared such well cited article as it discusses taxes rather thoroughly and includes applicable citations of authority across it. Those citations explain precisely the items we are discussing.
We are talking about carrying charges not acquisition or disposition taxes.
The issue we're discussing is in the title of this thread: are property taxes on a rental before it's placed in service deductible or capitalized? Let's stick to this one question.
Since the issue is important to many investors on this forum, I will continue defending my position until you present a compelling evidence to the contrary. (The articles you cited do not address this issue at all, they discuss a different issue: taxes on unproductive real estate held for investment aka Sec. 212 property - and you and I are already in agreement in that case).
So, here is my reasoning. Property purchased to be a rental is a property to become Sec. 162 (trade or business) property once it's placed in service. So, what happens before it's placed in service, in its "pre-operating phase"? The reason I use this term is because it's used by the Tax Court in a relevant case of Toth -128 T.C. 1 (2007). Here is a quote:
"...In the 1980s several Federal Courts of Appeals were asked to decide whether expenses paid or incurred during the preoperating phase of a profit-seeking activity were deductible or had to be capitalized. Each of the cases involved tax years arising before the effective date of section 195. Six Courts of Appeals held that, because section 212 and section 162 are in pari materia, preopening expenses7 for either a section 212 activity or a section 162 activity must be capitalized..."
Further in the court opinion, it expands on the Congressional intent, reaffirming this position in view of Sec. 195 (start-up expenses). Conveniently, the court addressed both Sec. 163 and Sec. 212, so we don't have to debate the distinction and which one applies to a rental property during its initial rehab. Either one produces the same result: must be capitalized.
Now, we can look at Sec. 164(a)(1) that has a very broad vague statement that allows a deduction for
(1) State and local, and foreign, real property taxes
I assume that your interpretation is that this clause makes property taxes paid during the initial rehab of a future rental property an exception to the general requirement to capitalize all expenses before placed in service?
If my assumption is correct, then we just have a difference in interpretation of Sec. 164(a)(1), and we can agree to disagree on this one. However, if you have other reasons to claim that pre-service taxes on a rental are deductible on Sch. A, please share for everyone's benefit.
PS. Sec. 266 election is not part of this debate. This election is only available IF the taxes are otherwise deductible, and our debate is precisely about whether or not they are deductible.
128 T.C. 1 (2007)
Would appreciate your response, as we do not have a closure
Would appreciate your response, as we do not have a closure
Clearly you have way too much time on your hands. I'm buried in work and don't have time to argue a relatively minor matter of interpretation with you. Yes, the property is going to be placed in service; however, you are citing a case that does not have relevance. If I was going to cite a case it would be one such as richmond television v commissioner on start up costs. That said, Toth was specially allowed her expenses that were claimed as she was deemed currently operating.
You should read 195 https://www.law.cornell.edu/uscode/text/26/195
"(c)Definitions For purposes of this section—(1)Start-up expenditures The term “start-up expenditure” means any amount—(A)paid or incurred in connection with—(i)investigating the creation or acquisition of an active trade or business, or(ii)creating an active trade or business, or(iii)any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business, and(B)which, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the trade or business referred to in subparagraph (A)), would be allowable as a deduction for the taxable year in which paid or incurred.The term “start-up expenditure” does not include any amount with respect to which a deduction is allowable under section 163(a), 164, or 174."
Again, we are not talking about the sale or purchase of RE. We are talking about the tax incurred during the holding phase.
Now, I have tax returns to work on.
I cited Toth not for the facts of the case but for the specific and very clear position of the Tax Court on the issue of expenses incurred during pre-operating phase: must be capitalized, regardless of Sec.195.
And you still did not answer my specific question, which was: what is your justification for your position that pre-service taxes are deductible. Are you suggesting that Sec. 164(a)(1) language overrides the capitalization requirement?
I have to assume this is your reasoning.
I cited Toth not for the facts of the case but for the specific and very clear position of the Tax Court on the issue of expenses incurred during pre-operating phase: must be capitalized, regardless of Sec.195.
And you still did not answer my specific question, which was: what is your justification for your position that pre-service taxes are deductible. Are you suggesting that Sec. 164(a)(1) language overrides the capitalization requirement?
I have to assume this is your reasoning.
I don't have time for this back and forth and since you want to have this conversation publicly:
You really should read the whole section instead of picking and choosing:
"In the 1980s several Federal Courts of Appeals were asked to decide whether expenses paid or incurred during the preoperating phase of a profit-seeking activity were deductible or had to be capitalized. Each of the cases involved tax[128 T.C. 5]years arising before the effective date of section 195. Six Courts of Appeals held that, because section 212 and section 162 are in pari materia, preopening expenses7 for either a section 212 activity or a section 162 activity must be capitalized. See Sorrell v. Commissioner, 882 F.2d 484, 487-488 (11th Cir. 1989), revg. T.C. Memo. 1987-351; Lewis v. Commissioner, 861 F.2d 1232, 1233 (10th Cir. 1988), revg. T.C. Memo. 1986-155; Fishman v. Commissioner, 837 F.2d 309 (7th Cir. 1988), revg. T.C. Memo. 1986-127; Johnsen v. Commissioner, 794 F.2d 1157, 1162 (6th Cir. 1986), revg. 83 T.C. 103 (1984); Aboussie v. United States, 779 F.2d 424, 428 n.6 (8th Cir. 1985). The Court of Appeals for the Ninth Circuit affirmed a holding of the Tax Court which found preopening expenditures of a section 212 activity could be deducted. Hoopengarner v. Commissioner, 80 T.C. 538 (1983), affd. without published opinion 745 F.2d 66 (9th Cir. 1984).8
Observing that section 195 as originally enacted9 in the Miscellaneous Revenue Act of 1980, Pub. L. 96-605, sec. 102(a), 94 Stat. 3522, was ambiguous and caused excessive litigation, in 1984 Congress amended the statute. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 94(a), 98 Stat. 614; S. Prt. 98-169 (Vol. I), at 282-283 (1984). The Senate print accompanying the Deficit Reduction Act of 1984 stated that the intent of Congress in amending the statute was to "decrease the controversy and litigation arising under present law with respect to the proper tax treatment of start-up expenditures" by requiring expenses similar to those allowed as deductions in Hoopengarner to be capitalized. S.[128 T.C. 6]Prt. 98-169 (Vol. I), supra at 283. The purpose of the 1984 amendment to section 195 was to bring sections 212 and 162 into parity when determining whether an expenditure has been incurred in a startup activity."
The 1984 amendment TO CLARIFY directs that we review 195 as it is stands and it specifically excludes real property taxes. Again you now need to look at 195(C)(1)(b). You must read the whole citation to understand the application. Prior case law had mentioned otherwise and then since the law had changed it clarified it
I am done with this conversation as I have work I need to do.
You read selectively, too:
the intent of Congress in amending the statute was to "decrease the controversy and litigation arising under present law with respect to the proper tax treatment of start-up expenditures" by requiring expenses similar to those allowed as deductions in Hoopengarner to be capitalized.
I'm done, too. Can't get you to answer yes or no to my question anyway,