Investment Real Estate

[Joe Mess]

A client inherits a 2 family house from mother in Nov. 2004. Appraised value is $600,000 then. Client sells the property in Oct. 2005 for $800,000. No rental income. I know this transaction flows onto Schedule D as a longterm cap gain, but where does the client show the expenses he paid to maintain the house thru 2005 such as utility bills, real estate taxes, insurance, etc.? Can I add these costs to his basis, or should they be itemized deducts on Schedule A?
Joe

[OldJack]

Most such expenses not deducted elsewhere in the year paid can be added to the cost basis of the property.

[Bees Knees]

Investment expenses are normally miscellaneous itemized deductions subject to the 2% AGI limit.

However, there is an election under Regulation Section 1.266-1 to treat taxes and carrying charges as capital expenses added to basis. The election applies to taxes, interest and other necessary expenditures. It does not specifically list utilities or insurance on the property, but the section seems to imply any normally deductible expense in connection with the investment property could be capitalized under the election.

[JG EA]

Election.

However for 2004 you would have had to include a statement with a timely filed return or amend the return by 6 months from the due date of the return to include the election to carry.