Schedule T

[Corduroy Frog]

For any number of reasons, farmers cannot always take advantage of farm mortgage interest and land taxes. In many such cases, I allocate a portion of these expenses to standing timber, using acreage dedicated to timber as an allocation base.

The obvious result is being able to have basis in timber, should the timber ever be cut and sold.

I apparently have fell down on the job, as I now understand this is allowed only by disclosed election. Any suggestions to help me recover? Surely 3 years of amended returns would not help, as the capitalization of timber would not have resulted in any change on the tax return for individuals.

[taxxcpa]

Timber

Couldn't you just reduce the basis of the timber back to what it would have been without the allocation of these costs?

[Corduroy Frog]

Misunderstanding

...and I will admit I am not the best communicator.

But why would I want to reduce the basis? That is the entire purpose for making the allocations - is to lower the gains when the timber is sold...

[taxxcpa]

Reduce basis

...and I will admit I am not the best communicator.

But why would I want to reduce the basis? That is the entire purpose for making the allocations - is to lower the gains when the timber is sold...

Of course would not WANT to reduce the basis. However if you have added to the basis illegally, then the basis could be corrected by reducing it.

[Edsel]

Restate the Question

Maybe this whole approach has been presented wrongly, as taxxcpa is telling how to clean up the mess by "undoing" the allocations that have already been made.

From the original post, Corduroy Frog's clients have been accumulating basis for a number of years, although never having filed an election to do so. To restate the question, is there anything that can be at this point to salvage the additional basis?

Via example:

Tuxedo bought 60 acres in 1998 for $100,000. At the time 30 acres were in pasture and 30 acres in timber. The land appears as two properties on the property schedule. In 1998, this appeared as 30 a. pasture for $50,000 and 30 a. timber for $50,000. Over the years Tuxedo has been deducting property taxes/interest on the pastureland as a current expense for raising cattle and hay. But he has been capitalizing the timber portion, and over the years has accumulated $6,000, such that his basis in the timber property is now $56,000.

In 2010, Tuxedo sells $14,000 in timber from the 30 acres not in pasture. The obvious intent was to count $6,000 as a basis such that he has capital gains on only $8000 instead of the entire $14,000 sale. But now we find out Tuxedo's preparer has never filed an election for him to capitalize the taxes & interest.

Does Tuxedo (and his preparer) have any recourse other than to strip away the $6000 as Taxxcpa has suggested?

[erchess]

Pub 535 pg 14 left hand column

It doesn't mention any need for a special election. I have spent a couple hours and I can't find where the perceived need to have made a special election comes from. I'm not saying Snags is wrong but until I find where the need comes from I have no idea how to find out whether there is a remedy for not having made it.

[gscpa]

capitalizing

I believe you are referring to a Section 266 election - I use it quite often for my timber clients. According to the regulations, an election needs to be attached to the return identifying the items that are being capitalized. The regulations also say it must be on the original return so I don't believe we can make the election after that point. Unfortunately, I would say the timber basis wouldn't reflect those expenses you thought you were capitalizing if an election hadn't been made.

[Davc]

Also, some of the property taxes on the timberland are attributable to the land, not the timber.

[Corduroy Frog]

Thanks to all

who have participated in this discussion.

Any ideas on how to make the election? If you look at Sch T, this is obviously not the purpose of that form.

Is it as simple as attaching a written statement to the tax return, announcing the election under §266 ?

[JG EA]

who have participated in this discussion.

Any ideas on how to make the election? If you look at Sch T, this is obviously not the purpose of that form.

Is it as simple as attaching a written statement to the tax return, announcing the election under §266 ?

Yes, just attach. Pub 535

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. For unimproved and unproductive real property, your election is good for only 1 year. 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, write a statement saying which charges you elect to capitalize. Attach it to your original tax return for the year the election is to be effective. 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.

Just to add that those numbers are if it is an amended return. I reference Section 266 on an original election.