Investment Land Purchase

[Unregistered]

Individual taxpayer purchases land for an investment
pays $4000. in interest first 2 years
My understanding is this would NOT be investment interest expense (4952)
and taxpayer would need to add interest to basis each year until land is sold or
placed in service for business, BUT I also believe this needs to be noted in an attachment to the return in the first year.
Any ideas?

[veritas]

It is investment interest. If you wish to capitalize you must elect with each tax year.

[Unregistered]

Investment Land Purchase

Are You Saying It Should Go On 4952 And Carried Forward

[veritas]

If there is no investment income it will be carried forward. If you elect under IRC 266 it will be added to basis. Do what is best for your client.

[Unregistered]

Thanks So Much!
J

[Kram BergGold]

Amend?

Since the first return was filed two years ago can it be amended to make the election to capitalize the interest? By the way taxes can be capitalized too.

[solomon]

No

Believe election has to be made when return filed. See Reg. 1.266-1(c)(3)

[veritas]

I posted a private letter ruling where taxpayers were allowed to file election for two prior years to capitalize taxes. It was in the infamous thread that was deleted.

[S T]

Another Thread

Veritas is this the post you are referring to:

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

http://www.thetaxbook.com/forums/showthread.php?t=2765

Page 2 - Real Estate Taxes

Sandy

[veritas]

Yes,

I thought it had been deleted.

Thank you

[solomon]

Plr 200629004

PLR 200629004 has nothing to do with this discussion. This was only concerning a 8832 election - a far cry from 1.266-1.

[veritas]

Correction

Plr 200629024




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August 14, 2006

IRS Grants Extension for AMT Victims to Elect to Capitalize Property Taxes

Document: PLR 200629024
Code Section: 266
Kleinrock's Analysis Section: 69.2


Taxpayers were granted an extension of time to comply with the requirements for making annual elections to capitalize property taxes on unimproved real properties that are held for investment. PLR 200629024.

The taxpayers are a married couple who filed joint tax returns for several tax years. Throughout those years they owned and held for investment certain parcels of unimproved real property. The taxpayers paid property taxes on their investment properties each year and they did not elect under Code Section 266 to capitalize the taxes to the appropriate property. Accordingly, the taxes they paid each year would ordinarily be deductible on that year’s federal income tax return. However, for those tax years, the taxpayers were subject to the alternative minimum tax. Because property taxes are a tax preference item for purposes of the alternative minimum tax, they were not able to obtain the tax benefit they would have if they had been able to deduct the property taxes on their tax returns for those years.

The taxpayers’ tax adviser was generally knowledgeable of the opportunity to make the election to capitalize taxes on unproductive and unimproved real property. But it was not until he attended a professional conference, after the taxpayers had failed to make the election for several years, that he learned about the interplay between Code Section 266 and the alternative minimum tax. Once he understood that the taxpayers subject to the alternative minimum tax could obtain tax benefits by capitalizing the property taxes, he promptly informed the them, and they made the election with their next return. The tax adviser also informed them of the possibility of filing a request for a private letter ruling granting extensions of time to file elections for the previous years. Soon thereafter they filed a request for a private letter ruling and ultimately sold the property.

The IRS noted that Code Section 266 provides that no deduction is allowed for amounts paid for such taxes and carrying charges as are chargeable to a capital account with respect to property, if the taxpayer elects to treat such taxes or charges as so chargeable. The regulations further provide that the taxpayer may elect to treat such items, otherwise expressly deductible, as chargeable to a capital account either as a component of original cost or other basis, or as an adjustment to basis. The items chargeable to a capital account include, in the case of unimproved and unproductive real property, annual taxes, interest on a mortgage, and other carrying charges. The election with respect to such items is effective only for the year for which it is made and is exercised by filing with the original return for the year for which the election is made a statement indicating the item which the taxpayer elects to treat as chargeable to a capital account.

The IRS said that had discretion to grant a reasonable extension of time for a taxpayer to make a regulatory election provided that the taxpayer acted reasonably and in good faith, and granting relief will not prejudice the interests of the government. Here it determined that the taxpayers had acted reasonably and in good faith and that the interests of the government would not be prejudiced and granted them an extension of time of 30 days from the date of the ruling letter to make the election to capitalize taxes on the property.

For a discussion of capital expenditures and adjustments to basis, see TaxExpert’s Analysis and Explanation, Section 69.2.








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Copyright © 2006 ATX II, LLC, a UCG company.

[solomon]

Big Difference

With the correct PLR number, that makes a big difference.