Partnership farming venture

[Avs19]

Hi,

Two individuals formed an LLC and created a partnership last year. The LLC purchased a 2.2M dollar home/land to eventually farm on. The home and the land sat vacant all year. The partnership incurred 22K in mortgage interest and 12K in insurance. My concern is the deductiblity of these expenses due to the fact the farm, if you want to call it that, was not operational in 2022.

[Terry53029]

They did nothing to get the farm ready to run as a business, or do you mean they just didn't have income the first year

[Avs19]

They did nothing to get the farm ready to run as a business nor did they have income. To this day, nothing has happened with the property.

[Terry53029]

I believe you can add property taxes, and mortgage interests  to cost basis, but not expense them. If your clients itemize their taxes they could take property taxes (I believe not subject to $10,000.00 limit) and mortgage interest as an investment expense. As far as insurance cost, maybe add to startup cost??  You will have to do further research, or maybe someone will jump in with more experience on the subject 

[sjrcpa]

When farming begins, how will the "home" be used, if at all?

[sjrcpa]

II think, but am not sure, that if you elect to capitalize carrying costs (IRC §266), you elect to capitalize all of them. No picking and choosing.

Also, this election is usually used for property that will be developed or flipped. Not sure it is applicable to pre-farming.

Sounds more like start up costs to me. Or investment expenses. How far off is to "eventually farm?

[Avs19]

I asked this question in an email earlier today but haven't received a response yet. I don't believe that they intend to live in the property. 

[Avs19]

I think capitalizing the interest makes the most sense. No taxes were incurred in 2022. IRC 266 doesn't mention insurance. Do you think that should be capitalized as well? I'm a bit hesitant on this since nothing has happened yet and not sure when something will happen. I'm hoping that they their intention was not to form a business and purchase a house with land just for the deductions.

[PATAX]

I researched insurance but I could not find anything definitive. Keep doing a Google search on this and see if you can find something. Let us know what you find as we are curious. Thank you.

[Avs19]

So I haven't found much regarding the insurance but my client did get back to me with some more details. The house was not being used by anyone but will eventually become a rental property once the roof gets fixed. They began getting the land ready to grow crops in 2022. The land/barn is 70% of what they purchased. I don't plan on writing off 30% of the interest and insurance since the house was not available to rent. I do think they can write off the other 70% since they were activily working on the land during the year. Unfortunately, they'll miss out on the extra 30% of interest and insurance expenses. I don't believe that they can use the extra interest as a second home on their schedule A because the property is under the LLC. I plan to take the 30%/10K that's non deductible against their capital accounts. 

[rbynaker]

I'm not seeing where a business has started or a property is available for rental.  My inclination aligns with SJR - startup expenses (if we're convinced there is a trade or business coming).

[Avs19]

According to them, they started to get the land ready in 2022. Not sure if that would constitute whether or not the business has actually started. I don't plan on deducting anything regarding the house/property until it's available to be rented out, which should be later this year once the roof is fixed.

[Just-Lisa-Now-]

what are they going to farm?  are they going to grow something or raise an animal or some kind?   Is the house going to be rented out?

Doesn't really sound like its in service or the business has started at all yet..... you probably need to elect to capitalize the carrying costs until its actually a business. IRC266 (I havent had to use this much, you'll want to read up on how this works)

[PATAX]

I agree with sjr and rbynaker. Always remember the matching (accounting) principle, IE matching income and expenses. Just like the economic substance principle in other situations.

[Avs19]

It's a lavender farm. No animals. The house will eventually be rented out. There's an old barn on the property where they're storing equipment. The only expenses in 2022 was the interest on the loan and insurance. IRC266 mentions carrying the interest but nothing about insurance. I agree with you, it doesn't sound like they did enough to consider it an up-and-running business in 2022.

One other piece of information that I was just made aware of is that the property is titled under the LLC and the loan is under one of the partners names. The partners are husband and wife but file separately. The partner with the loan is already capped out on the $750,000 interest deduction on his 1040.