Capitalized Interest and Taxes

[Corduroy Frog]

Before the real estate crash, two partners purchased several hundred acres for investment only. They pay interest and taxes and pay someone to mow the property. They have elected to capitalize all the interest and taxes so far.

As the years go by and real estate has not really recovered, they decided to do something different. The land had a house trailer on it that was actually quite livable. This year they paid to bring power and water hookups and decided to rent out the trailer to help offset expenses. Renter was not reliable and moved out -- not sure whether they will rent in the future or not.

The interest and taxes (to some extent) can now be deductible as operating expenses. If they do this, can they return to capitalization in future years?? Or should they be consistent and just forego deducting for this past year??

[Roland Slugg]

The election to capitalize, under Code §266, is an annual one. So your clients can resume the election at any time. In fact if it's in your clients' best interest to do so, it might be reasonable to even make the election for the year the trailer was rented out, making two allocations: (1) the portion of the land related to the trailer site ... couldn't be too much, could it? ... and the portion of the year the trailer was/was not rented.