New client bought small parcel of timberland with bank loan over several years and interest was never deducted (no business or second home use). Has now sold it and wants to deduct all interest paid in previous years. It's my understanding that such interest cannot be capitalized unless it was used to develop the place or prepare it for some sort of use (which it wasn't) and therefore he's out of luck on using the interest to reduce gain on sale. Is this correct?
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Have you considered if investment interest deduction is applicable? -
Yes, but
he doesn't have enough to itemize on federal (maybe state) and don't you have to have carried the interest forward as disallowed year by year on 4952?Originally posted by kathyc2 View PostComment
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TTB 4-14 shows that an election can be made to capitalize interest and taxes of unimproved land. Is your situation different?Comment
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Election
In year one he had to attach the election to his return to forego deducting the interest and capitalize. I do not believe you can amend to correct this oversight. However, if he had little or no investment income in 2011,12,13 you could amend and treat it as investment interst and the amounts in excess of investment income would carry forward to 2014 when maybe he could itemize.Comment
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...this is an annual election....Comment
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I understand that it's an annual election, but I thought (as Kram pointed out) that it had to be done one year at a time.Originally posted by Gretel View Post
He didn't have any investment income to apply it against along the way and the note was paid over ten years. While he kept track of total interest paid, no 4952 elections were made in previous years and he now wants to simply deduct the total of all interest paid over all the years in this year of sale. I didn't think you could do that. He won't want to amend all open years as that cost would exceed the deduction's tax savings.
Are you saying he can write off all previous years' interest at once?Comment
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No, I am not saying this. I actually have to expand my statement for the annual election. It's true but only if a statement was filed in the first year. I am not sure if after the first year statement, how the election is made: by just doing it or filing a statement every year.
I am very much interested in finding a way to somehow get the benefit of year's worth of interested capitalized on land when this election was never made. From my research it seems like any time to are in process of doing something with the land in order to improve it, you not only can but have to capitalize the interest. This include working with architects or the City or anyone, even if nothing comes of it. Some of these agencies might not charge, so not only bills would be an indicator. I have a client who is in this position - thinking about moving ahead (and work with outside people - but sometimes no expenses are incurred) and then stopping the process again because of feasibility issues. I did not know that this process is so complicated until you posted, Bart. Thank you so much for bringing this up.Comment
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Excellent find, NYEA.Originally posted by New York Enrolled Agent
For those who are unable to locate and read the above referenced PLR, I will summarize: It was issued by the IRS in 2006 to taxpayers who failed to capitalize real estate taxes on unimproved real estate for two consecutive years two and three years, respectively, prior to the then-current year. The IRS ruled that the taxpayers could make a late §266 election for each of the two "missed" years. In essence the IRS granted the taxpayers an extension of time to make the elections, a power over which the IRS has considerable discretionary authority under Code §301.9100.
Before attempting to apply the same result to the situation in THIS thread, however, the following important facts should be noted and considered: (1) In its PLR the IRS acknowledged that the taxpayers did deduct the property taxes as itemized deductions on their original tax returns, and it was not until their tax preparer realized that due to the AMT those deductions resulted in no tax benefit, at which time he advised his clients to make the §266 election in future years and look for a way to make the same election retroactively for the two earlier years. (2) Accordingly, the IRS commented in its PLR that the taxpayers had acted "reasonably" in relation to their understanding of the tax laws and the complexity of their tax returns. It is possible that if the taxpayer behind the current thread seeks a PLR, the IRS might conclude that he did NOT act reasonably when he failed to either (a) deduct the interest on Schedule A each year, or (b) make a §266 election for any of the years for which he could have done so.
Finally, since no §266 elections were ever made by the taxpayers in THIS thread, they should not treat the interest they paid over the years as if those annual elections had been made. They may, however, request a PLR of their own, and although one PLR can not be used as precedent for another, there is no reason why a taxpayer can't refer to an existing PLR in an effort to convince the IRS to grant a "me too" similar ruling. Having said that, PLRs are expensive, so the relative amount of the potential deduction, and the resulting tax to be saved, should be taken into account.Roland Slugg
"I do what I can."Comment
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Thanks you so very much, NYEA and Roland, that makes it pretty clear.Comment
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Okay, thanx all -- Kram/Gretel/Kathy for the advice and to NYEA/Roland for the practical law (you two guys should run for Congress -- maybe you could actually straighten out the tax laws since you've apparently, unlike Pelosi, read the stuff).
Anyway, in this case, the guy had never itemized and retro 266 elections/PLR/1040X costs would have exceeded total prep fee & savings (interest only totaled $5K over 10 years), so we ended up going without it. However, all's well that ends well -- he unexpectedly got a big refund due to unrelated factors and was so delighted that he left today without even mentioning the interest.
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It is the mark of an inexperienced man not to believe in luck! -- JOSEPH CONRADComment
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