Real Estate Taxes

[jainen]

Not exactly

>>The indirect costs being capitalized under Section 263A all represent costs for property already in use<<

Not exactly. Such operational costs are NOT allocated to the property in use, but to the new property being produced or acquired for sale.

[Brad Imsdahl]

Election to Capitalize Interest and Taxes, TTB page 4-14.

We are going to take a more conservative approach to this in our next edition of TheTaxBook.

Although we still believe it may work for mortgage interest and taxes on a principal residence, the majority consensus from our message board experts say it only works on vacant and unimproved land, or during the construction or improvement phase of a building. The examples that following the regulation seem to support that conclusion.

Rather than push the issue into areas that seem to have very little if any support, a conservative interpretation of this regulation would be to say that you can capitalize the interest and taxes on your vacant land in cases where you receive no benefit from claiming them as itemized deductions.

[JG EA]

I first became aware of the importance of this provision many years ago when I met a man who had owned vacant land for several years and had just sold it. He asked could he count all that interest and taxes he'd poured into the land while holding it for investment. I told him I'd look it up.

After looking it up I told him that it was either currently deductible on Sch A each year or there could have been a statement added each year to carry the interest and taxes. He wished he had known it before.

Since that time I've made a effort to catch this by asking at interview does the client have investment property, land, etc.

One thing I was mixed up on was did it have to be done in the first year? It said it needed to be done on the original return. But in further reading, it just says on the original return for the year you elect to carry the charges. Just to nail this down, do you agree that in a year you can itemize - use them on A. If you cannot itemize in a particular year, carry the charges in that years?

( Pub 535 says; "For unimproved and unproductive real property, your election is good for only 1 year. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed. For personal property, your election is effective until the date you install or first use it, whichever is later.")

I've never thought about it with a personal residence as in these post. These quotes sound like investment property. But it also sounds like business property which is confusing to me. But it doesn't sound like personally held real property to me. But, as noted in the posts above it doesn't say that it is limited.

(Pub 535 says; "Carrying charges include the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property....You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible.
You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge...")

[Bees Knees]

If it was limited to business and investment property, and non-business property was not included, then it would say that. Instead, it just says the expense has to be otherwise deductible. That leaves the door open for a personal residence, as long as the carrying charges you want to capitalize are otherwise deductible, like real estate taxes and mortgage interest.

This is why you have so many tax court cases going on all the time. The government can't just come out and say it like it is. The poor wording in the code and regs leaves room for interpreting things many ways.

[Unregistered]

I think the decision of the TB editorial board to take a conservative approach on this is sound. In fact, based on what I'll post I would suggest it is the only approach.

This is a paragraph from an old Tax Court case - some of the code sections have been changed during the revisions of the IRC but the case appears right on point. The taxpayers used a standard deduction each year & then attempted to capitalize the r.e taxes and m.i. on the property. Interestingly, the husband (MFJ) was a former IRS revenue agent but the Court ruled against him & his wife. Caps are added for emphasis.

Megibow 21 TC 197

"The residence upon which the petitioners claim the right to capitalize interest and taxes is not unimproved or in process of construction or improvement. It was in regular normal use. The interest [pg. 199]and taxes were not charges incurred in carrying it through a temporary period for some later more significant use. Those items could not be properly capitalized as a part of the cost of such a property either in the opinion of the Commissioner or under sound accounting principles. See W. A. Paton, Accountants Handbook, 2d ed., p. 1100; W. A. Paton and A. C. Littleton, An Introduction to Corporate Accounting Standards, p. 31. Furthermore, neither Congress nor the Commissioner EVER INTENDED that taxes and interest on a PERSONAL RESIDENCE in regular normal use be treated as carrying charges or capitalized. The petitioners cite no accounting or other authority to support their contention and the Court knows of none. It is unnecessary to discuss other arguments of the Commissioner in support of his determination on this point since he obviously did not err."

The taxpayer appealed to the 3rd circuit Court of Appeals. The Appeals Court affirmed the decision of the Tax Court. Megibow 218 F.2d 687

I would suggest that this is clear & convincing proof (Bees - do you agree?)

New York Enrolled Agent

[Bees Knees]

That appears to be a very old case. 1953 for the Tax Court Case and 1955 for the Circuit decision. The regulations came out after that case.

I agree with your conclusion, although I find it curious we have to go back to pre-historic times to find the answer. Many new laws and principals have been introduced since those early days of pre-historic accounting. Many tax rules have been passed since that have deviated from standard accounting principals. It surprises me that anything having to do with standard accounting principals still have any bearing on tax law today.

It's a good cite, NY EA. It pre-dates anything in my database.

[Roland Slugg]

Can NOT be capitalized

The fact that annual [real estate] taxes are specified in §1.266-1(b)(1)(i), but are omitted in §1.266-1(b)(1)(ii), makes it seem clear that annual real estate taxes on one's home can not be capitalized, but can only be deducted. Same thing, btw, for interest on one's mortgage.

Code §266/Regs §1.266-1 also applies equally to rental property, for which real estate taxes can only be deducted, never capitalized.

I apologize for this post appearing out of sequence. I'm still getting used to this Forum and clicked the "Post Reply" button at the bottom of a page, not realizing there was another page of replies. Still, I'm surprised this post didn't go to the end anyway. It this a little quirk in the mechanics of this board?

[Bees Knees]

I would say taxes would be considered a "necessary expenditure" that is incurred by someone developing or constructing improvements on a property. Taxes would fall under Reg Sec 1.266-1(b)(ii)(d). Unless you can provide a court citation where taxes were allowed to be capitalized for unimproved real estate but not for improved real estate, I think you are being a bit narrow in your interpretation.

You are looking too close at the words and missing the big picture. The title of the reg is "Taxes and carrying charges."

[Roland Slugg]

Sound accounting principles?

Even so, item (iv) leaves the door wide open for just about anything.

Well, yes, if you can get the Commissioner to agree that annual real estate taxes on completed property are, under sound accounting principles, chargeable to capital account. I wouldn't want to try to advance that argument.

The verbage below item (d) in Regs 1.266-1(b)(1)(ii) applies to all items enumerated above it ... (a), (b), (c) and (d) ... and it's moot anyway, with respect to the original post in this thread, because it applies only "up to the time the development or construction work has been completed."

[veritas]

Interesting article in Kleinrock's bulletin on Sec. 266 where taxpayers were granted extensions to file election to capitalize property taxes on unimproved real estate for two prior years. Also it was interesting to note that property taxes were deductible for regular tax but not amt. A good reason to make the election. PLR200629004

[dyne]

citing court cases

I noticed in one or more post that a court case was sited as authority. Also in the
current issue of TheTaxBooks several court cases are cited as authority. It was
my understanding that court cases are ONLY to be cited as authority IF they are a
Supreme Court Case (which in effect changes the law) or if IRS acquieses (agrees)
to the decision of the case. Accordingly NO importance should be given to ANY other court cases.
A court case ONLY affects the person named in the court case.
I remember researching issues and finding a long list of court cases on an issue in which
IRS lost, yet IRS continues to disallow the deduction etc. IRS should be required to accept
the courts decisions after they lose 3 cases, etc. unless they appeal the issue to the
surpreme court. AM I correct or has my thinking become muddled again?

[Bees Knees]

Court cases can be cited as authority.

Reg. Sec. 1.6662-4(d)(3)(iii), TYPES OF AUTHORITY. Except in cases described in paragraph
(d)(3)(iv) of this section concerning written determinations,
only the following are authority for purposes of determining
whether there is substantial authority for the tax treatment of
an item: Applicable provisions of the Internal Revenue Code and
other statutory provisions; proposed, temporary and final
regulations construing such statues; revenue rulings and revenue
procedures; tax treaties and regulations thereunder, and
Treasury Department and other official explanations of such
treaties; court cases; congressional intent as reflected in
committee reports, joint explanatory statements of managers
included in conference committee reports, and floor statements
made prior to enactment by one of a bill's managers; General
Explanations of tax legislation prepared by the Joint Committee
on Taxation (the Blue Book); private letter rulings and
technical advice memoranda issued after October 31, 1976;
actions on decisions and general counsel memoranda issued after
March 12, 1981 (as well as general counsel memoranda published
in pre-1955 volumes of the Cumulative Bulletin); Internal
Revenue Service information or press releases; and notices,
announcements and other administrative pronouncements published
by the Service in the Internal Revenue Bulletin. Conclusions
reached in treatises, legal periodicals, legal opinions or
opinions rendered by tax professionals are not authority. The
authorities underlying such expressions of opinion where
applicable to the facts of a particular case, however, may give
rise to substantial authority for the tax treatment of an item.
Notwithstanding the preceding list of authorities, an authority
does not continue to be an authority to the extent it is
overruled or modified, implicitly or explicitly, by a body with
the power to overrule or modify the earlier authority. In the
case of court decisions, for example, a district court opinion
on an issue is not an authority if overruled or reversed by the
United States Court of Appeals for such district. However, a Tax
Court opinion is not considered to be overruled or modified by a
court of appeals to which a taxpayer does not have a right of
appeal, unless the Tax Court adopts the holding of the court of
appeals. Similarly, a private letter ruling is not authority if
revoked or if inconsistent with a subsequent proposed
regulation, revenue ruling or other administrative pronouncement
published in the Internal Revenue Bulletin.

[Bees Knees]

citing court cases

I think what you are confused about is that it is the IRS who is bound by the Internal Revenue Code, the Regulations, and the Supreme Court. IRS is not bound by the decisions made in a court, unless it is a Supreme Court case.

However, in an audit, it would be foolish for an auditor in most cases to go against a cited court case, because you simply say to the auditor, I will take this to appeals, where an appeals officer is under obligation to review the case to see if the IRS position could withstand a court battle. Since the courts DO use other court cases as precedent, a court will more than likely use another courts decision in determining a current case. So it would be foolish for the appeals officer to cause a case to go to court knowing the likelihood of failure on their part is high. Unless of course the IRS is specifically targeting a position they disagree with and want to make an example out of the case and possibly get it to go to the appeals court level or the Supreme Court.

[dyne]

Thank you Bees Knees

Thanks for the clarification in my thinking. Best wishes.

[solomon]

Roland - believe you are right on.