Maintenance Fees Paid while Investment Property is Improved

[momona]

I cannot find any pubs that mention this so I would appreciate any guidance. Client bought a condo unit as a fixer upper with intent to flip it. He kept current on the maintenance fees. Upon its completion, he put it up for sale but pulled it off the market and made it a rental because the appraisal was lower than the asking price.

The question is about the maintenance fees he paid prior to it becoming a rental. Is it an investment expense (Form 4952), an increase to basis or something he just eats as a personal expense.

[ATSMAN]

I cannot find any pubs that mention this so I would appreciate any guidance. Client bought a condo unit as a fixer upper with intent to flip it. He kept current on the maintenance fees. Upon its completion, he put it up for sale but pulled it off the market and made it a rental because the appraisal was lower than the asking price.

The question is about the maintenance fees he paid prior to it becoming a rental. Is it an investment expense (Form 4952), an increase to basis or something he just eats as a personal expense.

Add to basis if the property was held for investment and no personal or rental use.

[TaxGuyBill]

I think you need to make an election to add it to basis.

https://www.law.cornell.edu/cfr/text/26/1.266-1

[Roland Slugg]

Concur. The specific Reg applicable to your situation is §1.266-1(b)(1)(ii)(d). The election for that category of expense only needs to be made one time for that project. (Regs §1.266-1(c)(2)(ii)(a)) The manner of making the election is described in Regs §1.266-1(c)(3).

Note that the taxpayer can NOT elect to capitalize the real estate taxes, because they are deductible currently. That election is only available for unimproved and unproductive real property. (Regs §1.266-1(b)(1)(i))

[taxea]

Property taxes paid prior to it becoming a rental would be added to the basis on sale.

[Kram BergGold]

My view

Taxes and mortgage are deducted in year paid
repairs and supplies can be capitalized if that was elected in year paid for
something like a condo fee might be a Schedule A 2% deduction as an investment expense.