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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9440
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I work for a US CPA firm. We have an LLC client that was selling

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I work for a US CPA firm. We have an LLC client that was selling land that he owned and developing it. However, for the last few years he has not had any income, but has incurred property tax expenses. Should we still capitalize the property tax expenses even though he has no income. This is actually a tax question.

Lane :

No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.§266

Lane :

Sure, that way when it's sold, there'll be a tax benefit, you said there's no income now right?

Customer:

No income for a few years. We would like to expense the property taxes.

Lane :

I dont understand .. no income to offset it with right?

Customer:

We would like to take a deduction on the companies tax return.

Lane :

the LLC has other income?

Customer:

No income, however, the company is an LLC and the loss will flow through to the partners' personal returns.

Lane :

I understand ... thought you meant the individual had no other income

Lane :

Hang on a sec ...

Lane :

Yep, no reason not to

Lane :

Deductible real estate taxes are generally any state, local, or foreign taxes on real property. They must be charged uniformly against all property in the jurisdiction at a like rate. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment. Refer to Publication 551, Basis of Assets, for more information. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits.


 

Lane :

... thought I saw that he IS selling it

Customer:

Then the deductibility will hold up in an audit? When he can he will sell the property, but hasn't had any sales for a few years.

Lane :

Understand now ... Is the LLC a single member?

Customer:

No. The partners are two LLC's.

Lane :

Do you have access to the operating agreement? Is there a stated business purpose for the LLC?

Customer:

Residential construction.

Lane :

I think you're fine, but hang with me a minute ... let me get some doc..

Customer:

I know construction period interest and property taxes have to be capitalized, however, there is no construction going on on the properties.

Lane :

Yep, I'm thinking this is now essentially investment real estate and would go on schedule E

Customer:

Okay, so what I'm getting from you is we should expense the property taxes and you think that position would hold up in an audit by the IRS?

Lane :

What do the other two LLCs do?

Customer:

The one that is our client is "Real Estate" as the business activity and product or service.

Lane :

Excellent .. and you're doing a 1065 right?

Customer:

Yes.

Lane :

You're good, it will hold up ... just found this in the tx guide:

Lane :

No matter what kind of real estate business you are in, you can deduct all of the mortgage interest and property taxes paid on your investment properties

Customer:

Okay. Thanks. Is that everything you have to say on the matter?

Customer:

I mean can you cite the booklet, etc.

Lane :

Here's you citation

Lane :
(3) Real estate expenses and taxes. The deduction for real estate expenses and taxes under section 822(c)(3) includes taxes (as defined in section 164) and other expenses for the taxable year exclusively on or with respect to real estate owned by the company

26 C.F.R. § 1.822–8
Lane :

Also from IRC §162 itself

Lane :


(a) General rule.--Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:




(1) State and local, and foreign, real property taxes.





(2) State and local personal property taxes.





(3) State and local, and foreign, income, war profits, and excess profits taxes.





(4) The GST tax imposed on income distributions.





(5) The environmental tax imposed by section 59A.






26 U.S.C.A. § 164 (West)

Lane :

again, as this has become held only for investment, it is deductible in the current year

Lane :

Questions?

Customer:

Okay. I think I'm satisfied. Thanks.

Lane :

You're welcome ... just wanted to find the backup, feel free ot bookmark and come back for reference

Lane :

If 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

Thanks much

Lane

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