Real Estate Taxes

[Donanita]

Real Estate agent purchased land to resell.Land is considered in inventory but client paid real estate taxes on land for this year. Can the real estate taxes be deducted or are they added to the basis of the property.

[Black Bart]

Donanita - Real estate taxes

I don't know who owed the taxes, but that's apparently what decides the question. Here's a quote from page two of IRS Publication 551, "Basis of Assets." I think you can pull up the pub in PDF format from the IRS website--or maybe (usually easier) Google. It's only a twelve-page booklet, so it shouldn't take long if you want to read the whole thing.

REAL ESTATE TAXES.
If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. You cannot deduct them as taxes.

If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Do not include that amount in the basis of the property. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

[ED SMITH]

RE Taxes

The amount corresponding to the portion of the year owned by buyer can be deducted, even though paid by seller. The basis must be reduced by the same amount.

Ed

[Donanita]

No Seller

Client works for a real estate broker and in the course of their business found a good deal on some land.The land has not been sold as client is holding for the value to increase and will sale in a couple of years so would the real estate taxes be deducted every year or added to the basis.Guess I didn't make the previous post real clear.Sorry

[Unregistered]

Guest

Sounds like this is something the Real Estate Agent is doing on his owe for investment, the property tax should be deducted on Sch. A every year it is paid.

[Bees Knees]

Generally, real estate taxes on property are currently deductible, even if the real estate is held as investment property, or treated as inventory by a real estate dealer. There are exceptions under the Uniform Capitalization Rules where an allocable portion would have to be capitalized, but I doubt that applies in your case.

There is an election under Regulation Section 1.266-1(b) where you can elect to capitalize interest and taxes rather than take a current deduction. You might want to capitalize, for example, if the taxpayer does not have enough other expenses to itemize deductions.

[jainen]

Excellent answer

Excellent answer. It helped me a lot, and I wasn't even the one with the question.

[Gretel]

Profit from answer

I, too, follow this thread with much interest. What, if a corporation is the owner of property and intents to develop and build on part of land and resell part of it? I thought, if it is inventory all costs (including taxes) can only be deducted when sold.

Maybe I am mixing apples and pears here?

[Bees Knees]

Real estate taxes on personal use or investment property are deductible in the year paid under Section 164. Likewise, real estate taxes on business property are deductible in the year paid.

The exception to this rule is found in Regulation Section 1.263A-1(e)(3)(ii)(L) where taxes (including real estate taxes) must be capitalized under the Uniform Capitalization Rules. Most taxpayers are not subject to UNICAP because of the $10 million gross receipts exceptions. Taxpayers that cannot use this $10 million gross receipts exception are manufacturers, and resellers of real estate (real estate dealers). Thus, the issue centers on whether your taxpayer is re-selling real estate as a dealer, or as an investor. If it is a dealer, then you have to apply the UNICAP rules and add an allocable portion of the taxes to inventory. If the taxpayer is re-selling real estate as an investor, UNICAP does not apply.

[Donanita]

There in lies the problem

Client is a real estate agent(sells houses,land,etc,) considered self-employed.One of her client came to real estate company and listed land which she bought to resale in the future as value is expected to go up.Client does not itemize so Sch A is out.I think the taxes should be added to the basis but wasn't sure.Client ask about deducting on her Sch C.

[Bees Knees]

Not a problem

A real estate agent and a real estate dealer are two different things. It appears your client is a real estate agent that normally doesn’t buy and sell real estate, but rather, acts as a broker to help others buy and sell their real estate. On this one occasion, she bought some real estate for herself as an investment. Unless she plans to do this on a regular basis, I would not categorize that transaction as a real estate dealer. A gain on the sale should still be reportable on Schedule D as a capital gain rather than ordinary income on Schedule C. Since she doesn’t itemize, then make the Section 1.266-1(b) election to capitalize the taxes until she sells the land.