Real Property Tax

[erchess]

I have a 2007 late return I'm working on with tons of property tax because the clients support themselves in part by buying improving and selling or renting real property. (Taxpayer is also a self employed carpenter and other than doing the work on spouse's properties he isn't much involved in these decisions.) I just did some reading in TTB to confirm my memories that the tax does not have to be on the first two homes to go on A and that property tax on property that is ready to rent but has not yet been rented can be deducted on Sch E.

As of 2007 there were a goodly number of properties whose eventual use was uncertain but on which there was real property tax. Regardless of what I do with the real property tax they will be itemizing and they will be filing a Sch E that will show a fully deductible loss.

I am thinking that if it helped them, all the real property tax could go on Sch A but as I say that doesn't seem to be the case. On the other hand I am thinking that real property tax on properties that were not rented out before during or after 2007 should only go on A and it would be incorrect to put them on E now even if they were available to rent in 2007? Am I wrong at any point?

[ChEAr$]

Just make a distinction between "ready to rent" and "placed in rental service."

The latter means taking active steps to find a renter.

[erchess]

Good point Harlan

but unless I'm mistaken all you need to do is put a sign in the yard and advertise that it's available as a labor for rent if someone is interested. I'd probably make sure my advertising budget didn't increase much once I was done and I think all my outlays except the down payment and purchasing expenses would be currently deductible. One might even get away with substantially increasing the advertising budget once the work was done.

[taxea]

I'm confused....is he selling theses properties or renting them? If he keeps them only long enough to improve and sell them wouldn't that be a Sch C?
How long does he rent them?
And are they for sale when the rental begins?

[erchess]

For Taxea

She buys the property, he improves it and then depending on the market and their needs for cash she either rents or sells it. There never has been a rental of a unit that was later sold although that might happen in the future. The discussion of rental while working on it and of labor in exchange for rent was all hypothetical and nothing of the kind has happened so far.

[dan doshan]

The buying, improving and maybe selling property may be an investment type activity or it may be a business (Sch C) with capitalization of costs until sold. Glad it is not my client as I don't know for sure just where the line is between the two.

If it is investment property they could elect to capitalize the property taxes, but you have to make that election each year I believe.

[Burke]

The continual buying and selling of property without rentals is treated as a business, and sales go on Sche C, profits subject to SE tax. They may also have an ordinary loss. The property taxes should not be carried to either A or E if this is the case. They should be capitalized to basis. Note that these transactions are treated as ordinary income regardless of the holding period, and not capital gains. They may have gotten away with classifying it as "investment property" the first time, but their subsequent actions show it should be treated as a business.

[Gary2]

The continual buying and selling of property without rentals is treated as a business, and sales go on Sche C, profits subject to SE tax. They may also have an ordinary loss. The property taxes should not be carried to either A or E if this is the case. They should be capitalized to basis. Note that these transactions are treated as ordinary income regardless of the holding period, and not capital gains. They may have gotten away with classifying it as "investment property" the first time, but their subsequent actions show it should be treated as a business.

It seems plausible to me that rentals could be part of such a business as well.