§266 versus Form 4952

[Snaggletooth]

Taxpayer purchased sizable investment in land in 2006, and his former preparer has prepared interest on Form 4952. As taxpayer does not have much investment income, most of the interest has carried forward. To make matters worse, taxpayer has no mortgage and is not able to itemize deductions. Clearly a bad strategy.

§266 election would have capitalized interest and taxes, both of which are significant.

Can taxpayer retroactively capitalize under §266? He has never benefitted from Form 4952 with a single dollar of deductible interest.

[JG EA]

No, cannot go back and capitalize it now. It is a year to year election. I've had clients that came in with a Form 4952 that hangs on forever. Goes down a bit each year because of a little interest on their return. But, the rest of it can be used if the thing sells. I prefer the election, but still is frustrating if no sale. For instance, one client has a piece of land we've been doing the election on each year because originally he said he was going to sell it down the road. Now, he will use it personally.So, it did not good.

In other case the election is better than the 4952 because you can carry the taxes and interest.Then you have to take into consideration if they can itemize and get current benefit from the taxes.

[Roland Slugg]

As another has pointed out, §266 is a year-by-year election, so your client will probably want to make that election from now on ... unless he has a year with significant investment income AND he also itemizes, since investment interest is an itemized deduction.

All may not be lost, for if/when the land sells, the gain may be used on F-4952 to release some or all of the disallowed interest. However, if the land sells at a loss, that won't help either. I probably would have advised your client to capitalize under §266.