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Section 266 carrying charges: Can this be claimed on an amended return?

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    Section 266 carrying charges: Can this be claimed on an amended return?

    1. Taxpayers own several parcels of vacant, unimproved land. They started buying in 2002 and last bought in 2010.
    2. Buying and selling land is not and has never been the taxpayers' trade or business. All property is owned by the taxpayers individually. They bought for investment. They never occupied any of the parcels as a residence of any type.
    3. Some of the parcels were acquired at property tax foreclosure sales, some bought outright during the economic downturn, and all were vacant when purchased. None of the parcels are adjacent, and none have been split during taxpayers ownership. When purchased, all had existing "driveways" and where needed culverts provided & maintained by a county or other governmental authority.
    4. For many prior years, they itemized deductions and included the property taxes paid on the vacant parcels on Schedule A.
    5. Vacant land property taxes were always paid in the current income tax year.
    6. While some of the parcels are wooded, they have not sold off any timber during their ownership, or done anything to improve the parcels (other than occasional surveys).
    7 Taxpayers began selling parcels in 2012 (and for what it is worth, they sell the land and any mineral rights). TP reach age 65 in 2012, spouse age 65 in 2013, and spouse is legally blind.
    8. Starting in 2012, each year they told their preparer (for whom I do some off season work) they still wanted to itemize, but it didn't make a difference; the preparer prepared and printed them a schedule A anyway, while filing using standard deduction.
    9. It two of the last 3 years, itemization would have resulted in a federal tax due (with Schedule A listing all the vacant land property taxes paid in that year).
    10 Question: can they amend the open years and make the Section 266 election without itemizing? (by attaching a list?)
    11 . Another question: could they amend and itemize (in the two of the preceding 3 years where they would owe federal tax if they had itemized) and make the Section 266 election?
    12. Yes, I thumbed through the earlier threads on Section 266/capitalized expenses (but not those threads on amended returns).
    13. They are selling two parcels this year (2017) for cash. They do not plan on any installment sales. Each parcel remaining (9) will likely result in $30,000+ gain when eventually sold (they plan within the next 5 years). .
    14 They are not doing like kind exchanges.
    15. If they had capitalized the property taxes over the years of ownership their basis would be higher: for 2016, for example, their taxable income would have been reduced by $6000.00 and a tax reduction (federal and state) of about $1100.00
    Friends double; family triple. Don't buy an audit for yourself. If someone has to go to jail make sure it is the client. Remember it is only taxes, nothing important.

    #2
    Timely Election

    Good case point taxguy.

    In so many words, itemization no longer works for them, even with deducting the property taxes, so deducting the taxes on Sch A no longer results in any benefit. With no remaining benefit on Sch A, the next best thing to salvage any benefit from the property taxes is to capitalize them. Results in perhaps no current benefit, but will create a higher basis when properties are sold.

    And the question is whether the election to capitalize (§266) can be made retroactively on an amended return. I don't think so. My research (and I'm not particularly good at it) reveals the election must be made on the original return.

    Additionally, once made, the election is effective for all future years until property is sold or construction consummated.

    Comment


      #3
      Agree that sec. 266 election cannot be made retroactively.

      Here is what TheTaxBook says:

      "Making the election. The election to capitalize carrying charges is made by attaching a statement to an original tax return for the year the election is to be effective. The statement should indicate which charges the taxpayer is electing to capitalize. If the return is timely filed without the election, the taxpayer can make the election on an amended return filed within six months of the original due date (not including extensions). On an amended return, write “Filed pursuant to section 301.9100-2” on the attached statement."
      "You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard

      Comment


        #4
        Thanks to nashville and rapid robert

        Appreciate your input, while wishing the answer was different.

        MTG
        Friends double; family triple. Don't buy an audit for yourself. If someone has to go to jail make sure it is the client. Remember it is only taxes, nothing important.

        Comment


          #5
          Each year on its own

          Nashville, I do not have any resources handy but have done research on this subject before and believe each year stands on it''s own and the election to capitalize needs to made every year if applicable.

          Comment


            #6
            Originally posted by Gretel View Post
            Nashville, I do not have any resources handy but have done research on this subject before and believe each year stands on it''s own and the election to capitalize needs to made every year if applicable.
            Gretel - I think this might be one of those "it depends" answers. From Reg. §1.266-1

            (2)--
            (i) An election with respect to an item described in paragraph (b)(1)(i) of this section is effective only for the year for which it is made.

            (ii) An election with respect to an item described in:
            (a) Paragraph (b)(1)(ii) of this section is effective until the development or construction work described in that subdivision has been completed;
            (b) Paragraph (b)(1)(iii) of this section 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 the taxpayer;
            (c) Paragraph (b)(1)(iv) of this section is effective as determined by the Commissioner.

            Thus, an item chargeable to capital account under this section must continue to be capitalized for the entire period described in this subdivision applicable to such election although such period may consist of more than one taxable year.

            Comment


              #7
              NYEA, I agree that capitalization of carrying charges depends. However, this thread is about bare land, no development. Unless c applies I believe this paragraph does not apply in this situation. Do I misunderstand?

              Comment


                #8
                Originally posted by Gretel View Post
                NYEA, I agree that capitalization of carrying charges depends. However, this thread is about bare land, no development. Unless c applies I believe this paragraph does not apply in this situation. Do I misunderstand?
                I didn't infer that both you and Nash were talking only about this situation If indeed, both of you are talking strictly about undeveloped land then (2)(i) applies and I agree with you an annual election is required.

                Comment

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