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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9490
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Partnership owns real property (raw land) which it may sell

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Partnership owns real property (raw land) which it may sell at some future date. Are property taxes currently deductible or should they be capitalized?
Lane :

Hi,

Lane :

If the land is being held for resale, all taxes should be capitalized until the land is sold. At this point the taxes will be deducted as part of cost of goods sold.

Lane :

The only exception would be in the case of land that was originally held in a trade or business or a for-profit activity that becomes unproductive. In this case the taxes may continue to be deducted as before until the taxpayer's intent with respect to the land changes.

Lane :

See: Tsakopoulos v. Commissioner, T.C. Memo 2002-8

Lane :

Is there any intent to develop at all?

Lane :

Two questions: (1) have you just acquired the land and if not has your intent with respect to the use of the land changed? ... (2) how has the land been used for, say the last five years?

Lane :

I still don't see you coming into the chat, so I'll answer in a general fashion that should cover all the possibilities... My first answer DID have the implicit idea that you nay have had some intent to develop (given the partnership ownership) ... but let me give you the overview here, so you'll have a frame of reference or making a decision...

Lane :

Generally, property taxes may be deducted under three code sections: §162 - trade or business, §212 - for-profit activity, or §164 - investment.

Lane :

If this is simply land, held for investment ... NO intent to develop ... (by the way, the court held, in Tsakopoulos, that the determination as to the proper treatment is made at the time taxes are paid, not when the property is acquired.) then §164, specifically §164(a)(1), allows deduction for real property taxes if not deductible or required to be capitalized by another section. Taxes deducted under this section are itemized deductions for individuals not subject to the 2% floor. There are itemized deductions because they are not specifically allowed in computing adjusted gross income by §62 and not included in the definition of miscellaneous itemized deductions by §67. Partnerships and S corporations report these taxes as a separately stated item. Individuals report these deductions on schedule A.

Lane :

In summary, there are two outcomes for real property taxes paid on undeveloped land. It can be deducted under §164 as an itemized deduction. Or, if the owner anticipates developing the land in some way, it should be capitalized. Alternatively, the owner may capitalize taxes otherwise deductible under §164 by making a §266 election. Depending on the nature of the land holdings this election may be permanent or may be an annual election.

Lane :

... was hoping you'd come online here, and provide more detail, but this should give you enough to make an informed decision

Lane :

Let me know ...

Lane :

Lane

Lane :

f this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane and other Finance Specialists are ready to help you
Hi Strong,
... just checking back in here, as I never saw you come into the chat.
Let me know if you have questions,
Lane
(positive feedback appreciated)