Residential Rental House

[taxxman02]

Client purchased a home in the Hamptons for the sole purpose of making it a rental and closed on 07/30/20. As of today the house is still not available for rent, I know I can not write any expenses off until it is made available for but my question concerns the mortgage payments and taxes paid so far. He already has two personal homes, so declaring it personal home is not an option. Can I add the interest and taxes to the closing costs or maybe to the basis of the home when it is available for rent. Any suggestions will be welcome.

[Terry53029 · Accepted solution]

Your client can use both the mortgage interest as investment interest, and take property tax on his 1040 schedule A if he itemizes. If his property taxes take him over SALT limit ($10000) then he can use the election 266, and capitalize the property taxes

[IRonMaN]

Is the house anywhere near George Costanza's home?

[taxxman02]

Terry53029

 I like your answer thanks and I will be using the 266 Election, my next question though I am using Basic is there a form to use or do I create a word document and attach it as a PDF to send it in electronically. This is a first for me.

[Terry53029]

Don't know if it is in basic, but in pro, click on where do I enter, and type in 266, and the form pops up, You could also press f6, and form menu pops up

[joshuabarksatlcs]

Last time I checked, Sec 266 allows capitalization of property tax only for unimproved and unproductive real property.  Don't think it applies to a home.

Check Regs for Sec 266 for sure.  the above is based on my brain-half-fried recollection

But then, homes in the Hamptons may enjoy special perks.

[Terry53029]

@joshuabarksatlcs From: 

26 CFR § 1.266-1 

(1) The taxpayer may elect, as provided in paragraph (c) of this section, to treat the items enumerated in this subparagraph which are otherwise expressly deductible under the provisions of Subtitle A of the Code as chargeable to capital account either as a component of original cost or other basis, for the purposes of section 1012, or as an adjustment to basis, for the purposes of section 1016(a)(1). 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.

(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(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, 

[joshuabarksatlcs]

Exactly...

(i) In the case of unimproved and unproductive real property: Annual taxes, interest on a mortgage, and other carrying charges.

(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,

Annual tax is included for unimproved and unproductive real property, but NOT for real property, whether improved or unimproved and whether productive or unproductive

Unless you include annual tax as "d.  Other necessary expenditures"

I always took the regs to mean property tax (annual tax)  is allowed to be capitalized on unimproved real property and NOT improved.....

[dkh]

If it is do you have a message to send to George?  

[Terry53029]

@joshuabarksatlcs I have always looked at it as   Other necessary expenditures not that it means much, but none of my clients have ever got a letter from IRS.  

[joshuabarksatlcs]

Point (also capitalization for your clients) well taken.

I have never had a client with improved real property who would need to capitalize their expenses.  Perhaps I don't have clients who would leave their assets idle.  So, I never researched it. 

Alex, I'll take Capitalize Everything for 1000... 

[taxxman02]

My client is fixing up and doing most of the work himself that's why it has taken so long to get it available for renting. He is estimating having it ready by Jan so next year I will have a whole year (2021) of taxes and expenses.

[taxxman02]

I read in the TT community some one suggested amortizing instead of capitalizing, your thought on this.