Expense or capitalize

[ILLMAS]

Whipper snapper bought a townhouse in a gated community for investment, didn't read the fine print (HOA bylaws) that the townhouse cannot be used as rental unit, townhouse has been empty for a while since the TP doesn't live in the state the property is located.  What would be the proper way to handle the expenses (mortgage interest, property taxes, assessments etc....) expense or capitalize?

Thanks

MAS

[Jack from Ohio]

Since it cannot be available to rent, all the expenses are his personal expenses, and not deductible at all.

[jklcpa]

It sounds like the TP's intention was for the property to be held as investment, and property doesn't always have to be rented to be considered investment property; it could be because of its potential to appreciate in value.  Mortgage interest could be investment interest expense reported on the 4952, other carrying charges may be capitalized (requires an election), and obvious items that are required to be capitalized on any property would, obviously, also be added to basis.

[Abby Normal]

If you put the mortgage interest on 4952 it might be there for a very long time. You can elect to capitalize any of the three classes - interest, taxes or "other carrying charges" on a year by year basis.  It is important that you keep track of what you have elected to capitalize, because the whole point of the exercise is to have the capitalized expenses in your basis, when you sell the property.

https://www.forbes.com/sites/peterjreilly/2013/05/13/electing-to-capitalize-expenses-can-pay-off-on-sale/#55de7e670f01

[RitaB]

1 hour ago, jklcpa said:

It sounds like the TP's intention was for the property to be held as investment, and property doesn't always have to be rented to be considered investment property; it could be because of its potential to appreciate in value.  Mortgage interest could be investment interest expense reported on the 4952, other carrying charges may be capitalized (requires an election), and obvious items that are required to be capitalized on any property would, obviously, also be added to basis.

 

52 minutes ago, Abby Normal said:

If you put the mortgage interest on 4952 it might be there for a very long time. You can elect to capitalize any of the three classes - interest, taxes or "other carrying charges" on a year by year basis.  It is important that you keep track of what you have elected to capitalize, because the whole point of the exercise is to have the capitalized expenses in your basis, when you sell the property.

https://www.forbes.com/sites/peterjreilly/2013/05/13/electing-to-capitalize-expenses-can-pay-off-on-sale/#55de7e670f01

 

$^%& I knew this one because I just made the election to capitalize an expense on a return a month ago, and you guys beat me to it.  And here's a quarter for the swear jar. 

[jklcpa]

Dr Abby, the chiropractor... straightening me out. 

[Abby Normal]

20 hours ago, jklcpa said:

Dr Abby, the chiropractor... straightening me out. 

I'm going to enjoy this for a minute because it may never happen again!

[jklcpa]

7 minutes ago, Abby Normal said:

I'm going to enjoy this for a minute because it may never happen again!

haha, you know that's not true! You and some other exceptional members have corrected me when I'm wr...wr...wr...

 

wrong (there I said it  ), and I may not say it openly ,  but I do appreciate that you make sure the topic is explored fully and that we all end up with the correct answer.    Don't I at least give those corrective posts a like?  

 

Believe it or not, I am still human  and make mistakes. 

[michaelmars]

why not take the interest and taxes on the clients "second home"?

[Abby Normal]

1 hour ago, michaelmars said:

why not take the interest and taxes on the clients "second home"?

Well, he's never intended to use it as a residence, and if he sells it at a loss, the loss would be nondeductible.

[Max W]

 

you can elect (Sec 266) to deduct or to capitalize carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules. Pub 551.  It can be done on a year to year basis.

Under TCJA , in some cases capitalization may be the only way to get any benefit from these expenses.

The lesson here - read the fine print, or better yet, spend a few bucks and take it to a RE lawyer.