Investment Property?

Client's parents purchased a property in another state in 2017. Through the years, they lived there occasionally but had never made it their primary residence. Three years ago, his parents quit-claimed the property to him (so I suppose it was a gift). After becoming the owner of the property. client had never made it his primary residence either. The property was never used for rental. Client sold the property in 2021. A few questions:

(1) From how I see it, the property was a second home/vacation home to client and his parents, so he will report the sale on Schedule D as a sale of an investment property. Is it right?

(2) Since client's parents and also client himself lived in that property occasionally, how are the expense, such as property tax, insurance, gas/electric, maintenance, etc, to be allocated between deductible and non-deductible portions?

(3) Client and his parents have never claimed any of the expenses in their tax return. Can client claim the deductible portion of the expenses in all previous years in his 2021 tax return?

(1) Schedule D as a personal capital asset.
(2) Property tax and mortgage interest schedule A. No other deductions.
(3) No.

Agree with HowardS that this was a personal capital asset. It wasn’t investment property due to the prior personal use. See Moore, T.C. Memo. 2007-134:

https://scholar.google.com/scholar_case?case=5498014412195504426&hl=en&as_sdt=6&as_vis=1&oi=scholarr

(1) Schedule D as a personal capital asset.
(2) Property tax and mortgage interest schedule A. No other deductions.
(3) No.

On number 2, are you including improvements as non deductible, or would you increase basis by things like kitchen remodels, additions, etc?

Increase basis for capital improvements.
Add closing costs to basis.

(1) Schedule D as a personal capital asset.
(2) Property tax and mortgage interest schedule A. No other deductions.
(3) No.

After I communicated with the client further, he clarified that the property was never used for vacation home. They just went there occasionally to look at the property and made sure it was alright.

So in this case, are the HOA, insurance, utilities expenses, etc, that were paid through the years deductible when the property was sold?

No.

And even if it were investment property, those expenses would be investment expenses, which are miscellaneous itemized deductions, currently not deductible. You can't take them on Sch E since he never held the property out for rent.

I understand.

But in case he did not deduct those expenses before, can they be added onto the cost basis when he sold it?

Or he will have to amend the prior years’ tax returns?

By the way, I did not prepare his prior years’ tax return. He is a new client this year.

The expenses that can be added to basis are spelled out in sec 266 and its regs.

If any should have been deducted and were deductible and the years are open, they can amned and claim a refund.

As the property doesn't appear to be unimproved land and wasn't in the process of being developed or redeveloped, I think Sec 266 is off the table.

https://www.thetaxadviser.com/issues/20 ... nning.html

Other real property may be eligible

266 election must be made on original return.

Unless they can get 9100 relief. But they probably can't, because it would result in a lower tax overall. And probably not worth the time and expense of trying. And of what is shown as possibly to be capitalized, which would be eliginle, if any? Enough to bother with?

TCJA eliminated 2% misc investment expenses.
Seems this horse is legs up.