capitalization of carrying cost

new client purchased a house as an investment with the intention of renovating it and selling it at a profit. House purchased on 5-14-18 and listed for sale on 12-4-20. Sold 5-3-21. The client is including the real estate taxes incurred from the point of purchase up until the sale date in the cost basis as a capitalized cost under Sec 266. I believe the taxpayer had the right to capitalize the cost up until the renovations were completed since this was an investment property and real estate taxes are a deductible necessary expense. However no election to capitalize the cost under Sec 266 was attached to their 2018-2020 return. Can the election be made on an amended return for 2019 and 2020? They also included utility expenses in the capitalized cost as a necessary carrying cost.However only deductible expenses are eligible to be capitalized under 266. Investment expenses under TCJA are no longer deductible so I do not think such cost could be capitalized.

Appreciate any comments on the above.

I think the election needs be made on the original tax return. Also, I thought with the sec 266 election, the ability to capitalize real estate taxes would be on only vacant land. See article below.

https://www.thetaxadviser.com/issues/20 ... deductible

But there can be relief under 1.9100-3 for a late election. It's not automatic and requires a ruling and, I believe, a fee to IRS. It may even cover a closed year.

https://www.thetaxadviser.com/issues/20 ... 14-03.html
https://www.law.cornell.edu/cfr/text/26/301.9100-3

This is not his trade or business, right?

It is investment property. In the tax advisor article it indicates in the case of real property cost can be capitalized for expenses during renovation to existing structure or additions.

Thanks for the input and direction!