Investment Property - clarification

[TaxGal]

Thank you Old Jack for your previous response....I have additional information regarding taxpayer's investment property. He is holding the property (it is currently vacant) while waiting for plan approval from the city. Once approved, he will obtain a construction loan and begin construction. In the meantime, he is paying the mortgage and property tax on the property. Should the interest and taxes be capitalized? If construction has not commenced, could they be deducted?

[OldJack]

It all depends upon how the property is classified in the hands of the owner.

Unlike mortgage interest, the real estate tax deduction is not limited to the first two homes owned by the taxpayer [TTB 4-10]. If non-business real estate is owned by a taxpayer, he may deduct all real estate taxes on schedule A regardless of how many properties he owns.

Home mortgage interest on the first 2 homes owned may be deducted on Sch-A. Interest on money borrowed to purchase investment property is investment interest subject to deductible upto investment income (but mortgage interest is not investment interest).

Construction loan: If interest is paid on a construction loan prior to the completion of the home for occupancy, the interest can be deducted as mortgage interest for a period of up to 24 months, but only if the home becomes the taxpayers first or second home at the time it is ready for occupancy [TTB 4-13]. Interest on the loan paid prior start of construction is personal non-deductible interest.

Exception to the requirement to us UNICAP: Home construction contractor that completes construction of homes within 2 years and average annual gross receipts for the preceding 3 years are not more than $10 million [Code §460(e)(1)].

Or, the taxes and interest is commonly capitalized as part of the cost basis of the home.

[TAX]

It all depends upon how the property is classified in the hands of the owner.

Unlike mortgage interest, the real estate tax deduction is not limited to the first two homes owned by the taxpayer [TTB 4-10]. If non-business real estate is owned by a taxpayer, he may deduct all real estate taxes on schedule A regardless of how many properties he owns.

Home mortgage interest on the first 2 homes owned may be deducted on Sch-A. Interest on money borrowed to purchase investment property is investment interest subject to deductible upto investment income (but mortgage interest is not investment interest).

Construction loan: If interest is paid on a construction loan prior to the completion of the home for occupancy, the interest can be deducted as mortgage interest for a period of up to 24 months, but only if the home becomes the taxpayers first or second home at the time it is ready for occupancy [TTB 4-13]. Interest on the loan paid prior start of construction is personal non-deductible interest.

Exception to the requirement to us UNICAP: Home construction contractor that completes construction of homes within 2 years and average annual gross receipts for the preceding 3 years are not more than $10 million [Code §460(e)(1)].

Or, the taxes and interest is commonly capitalized as part of the cost basis of the home.

My client, Doctor, is constructing new bldg. Construction was completed on 12/01/06. Const. started in 2005
I have accumulated all costs such as payment to tilte company etc. on Balancesheet.

What should I do with Interest on loan? Can I deduct it in 2006 or do I need to add these interest expenses on balance sheet and then amortize it.

Thank you in advance for your help.