Sales tax deduction

[jimenright]

I have a client who is building two rental homes. He wants to deduct, on schedule A, the sales tax on all the materials he purchased for the construction. This is a very large deduction. I think these taxes are part of the cost of the rental asset and not deductible as a sales tax deduction. However, I am unable to find anything that says the taxpayer cannot take the dedution.

Please help.

[S T]

Hmm

Not sure if it matters, but is the t/p - owner/builder, or has he contracted to have the units built?

The reason I ask is that In Pub 523, If you contracted ---- the amount it cost you to complete the house the basis is the land plus the cost of labor, materials, and amounts paid to the contractor (wouldn't the contractor have paid the sales tax on the materials and passed it on to the t/p)?

If the house was built by you (t/p) the basis is the total amount it cost you to complete it - do not include your own labor.

Maybe this is a starting point

Then in Pub 530, it talks about electing to deduct the sales tax (as an itemized deduction on Schedule A then you cannot add to basis) on the purchase or construction of "your" home - so not sure if that applies to "rental property"

I haven't found the part where it is "your home" vs "rental property"



Sandy

[Davc]

During the construction period of a rental or business building everything is capitalized. From TTB 4-9:

Under either method, taxes paid on items used in a trade or business
are not deductible as itemized deductions.

[jimenright]

Pub 527

"Residential Rental Property" on page7, lists an exception that says "If you deducted state and local general sales tax on schedule A, do not include those sales taxes as part of your cost basis." This quotation implies that sales taxes from the building of a rental property are deductible on schedule A.

[Davc]

An exception is not the general rule. The use of the word "if" indicates that the exception is for property converted to a rental from personal use.

[jimenright]

Are we reading the same pub?

The quote was from 2009 pub 527 pg 7.
The heading is "Basis of depreciable property" sub heading "Cost Basis" It is not about converting from rental to personal use. You are reading the wrong column. The word "If" means what it says. The exception deals with not including sales taxes in basis when they were previously deducted.

An exception is not the general rule. The use of the word "if" indicates that the exception is for property converted to a rental from personal use.

[AJsTax]

Davc

is correct. If you used a home as a first or second or investment home and deducted sales tax on that property that sales tax is not part of the basis. You already protected that money from income taxes once. cant do it twice.
If you are building for rental purposes the sales tax on the material is added to basis.

Many places there is no sales tax on real estate/buildings because we pay real estate tax on that.

[jimenright]

The original inquiry

was to try to find something in the regulations or publications that says a taxpayer building a rental home from scratch could not deduct sales taxes on schedule A. I do not believe this is proper but cannot find anything that says the taxpayer cannot do it. He did pay the sales taxes and sales taxes are deductible at the present time on schedule A.

[AJsTax]

Sales tax are NOT deductible

on Sch A for business property, only for personal use property.

[jimenright]

Thanks AJ.

I believe you but where do you find this in the IRS pubs, code. regulations, rulings,etc.? I have tried in vain to find it. My client has been told by others that he can do it. I need to show him and myself that he cannot.

[JG EA]

I believe you but where do you find this in the IRS pubs, code. regulations, rulings,etc.? I have tried in vain to find it. My client has been told by others that he can do it. I need to show him and myself that he cannot.

Line 5 instructions.
"Do not include sales taxes paid on .
... items used in your trade or business"
Although I must say that rentals didn't used to be thus..

[jimenright]

It is not his trade or business.

He is a school administrator. He does not file a schedule C. He is building two homes possibly for rental but may live in one of them. He is financing the building with personal funds.

[Davc]

For this purpose a rental is considered a trade or business.

[Nashville]

Deductible

Allowances for deductibility on Schedule A "trumps" other considerations in most instances. For example, $$$ borrowed for business can be deducted on Schedule A if it is secured by a second mortgage, even though the money was borrowed for business purposes. The taxpayer can choose to do this, and "trump" the business use if he so desires. So long as he doesn't "double-dip" and take the deduction twice.

I believe sales tax falls into this category, whether it is for a new home, a car, whatever. He cannot double-dip and accumulate the sales tax into his basis.

[solomon]

Would not this fall under §263A - property produced by the taxpayer.