Election to Capitalize

Technical topics regarding tax preparation.
#1
Bell  
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435
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TP owns business property that has been for sale for 3 years now going on 4. He is electing to capitalize expenses under IRC sec. 1.266-1. This property was a restaurant now sitting idol.

I know he can take Insurance, taxes, Mortgage Interest. Can he take the utilities? I have been including them. Thank for any help..
 

#2
Nilodop  
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Pennsylvania
Is work being done to improve or add on to the property while it is idle? Here's what the reg says can be capitalized.

The items thus chargeable to capital account are:

(i) In the case of unimproved and unproductive real property: Annual taxes, interest on a mortgage, and other carrying charges. [this is not applicable to you].

(ii) In the case of real property, whether improved or unimproved and whether productive or unproductive:

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds),

(b) Taxes of the owner of such real property measured by compensation paid to his employees,

(c) Taxes of such owner imposed on the purchase of materials, or on the storage, use, or other consumption of materials, and

(d) Other necessary expenditures,

paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property, up to the time the development or construction work has been completed.

You may have nothing to capitalize.
 

#3
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I know he can take Insurance, taxes, Mortgage Interest.

No you can’t, you’ve made a mistake.
 

#4
Bell  
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435
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19-May-2014 3:35pm
I need to back away from this. TP was deducting all of this on schedule C before he came to me. No income, just expenses.
He purchased a restaurant with high hopes that never materialized. He put it up for sale, however I just found out it is no longer for sale. And, no he isn't doing any improvements. Just up keep. I am thinking I will only take the taxes he paid on Sch A. I have done this on rental property that was being renovated and then sold. Maybe I took the wrong items? That has been about 8 years ago.
 

#5
COGS  
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I don't know why I am finding this topic frustrating. I too have a new client and had a grove and cut down all of the trees and has been deducting the costs each year on Schedule F. Now I will have to explain why they can't do that anymore. And the language of electing to capitalize is just so wishy washy. I see this language "Ordinarily, a current deduction is preferred over capitalization, which postpones any tax benefit to a later year. A Code Sec. 266 capitalization election is useful where it preserves the tax benefit of a deduction that would otherwise be lost. An example is taxes and carrying charges on unimproved and unproductive real estate" in my tax research but it is not linked to a code section telling me you can't deduct them they can't deduct because the land is not being used. I am getting too old and forget these things. I know they can't do it but when I want to prove it, it is hard to find and I start doubting myself.
 


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