Capitalizing Property Taxes
There is an option to capitalize unimproved and unproductive real estate property taxes. This option may be appropriate when a taxpayer is subject to the AMT or the tax deduction is subject to the SALT limitation.
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AMT - For alternative minimum tax (AMT) purposes, taxes are not deductible and combined with other AMT deduction limitations may trigger the AMT.
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SALT – Currently, the itemized deduction for state and local taxes is limited to $10,000, and with property taxes and state income tax this amount is frequently exceeded.
For taxpayers affected by the AMT, conventional wisdom dictates deferring tax payments to a subsequent year (when the AMT may not apply). When deferring such payments, care should be exercised to avoid late-payment penalties and interest on underpayments.
In addition, taxpayers who are affected by the AMT, the SALT limitation, or who are simply taking the standard deduction can annually elect to capitalize the taxes that they paid on unimproved and unproductive real estate. This means forgoing the deduction and adding the amount of tax paid to the real property’s cost basis (Reg Sec 1.266-1(b)(1)). Thus, the real property taxes paid on a personal residence will not qualify to be capitalized.
To make this election, the taxpayer must file a statement with the original return for the year of the election; this statement must specify the item(s) that the taxpayer has elected to capitalize (Reg Sec 1.266-1(c)(3)).