I took a loan to purchase an investment property in 2021 and sold it in 2022 (held it for less than a year) for a profit. The home was vacant all this time. I did not live in it nor did I rent it. I have seen online discussions saying that mortgage interests and property taxes can be added to the cost basis (as investment expenses), since this was an investment property. Is this correct? If not, can I deduct those expenses? I am not a professional trader. This was just a one time investment.
IRC section 266 and related reg
statement must be attached to return - didn't see it in Turbotax
An example statement to attach to a tax return:
Election to Capitalize Property Carrying Charges. The taxpayer hereby elects, pursuant to IRC Sec. 266, to capitalize, rather than to deduct, the following carrying costs incurred with respect to [describe property] located at [property location].
Below this, provide both a description and amount for the costs relating to this election.
*
this is an annual election so if you paid interest and taxes in 2021 and didn't make the election with that return you can't include them.
I paid mortgage interest and property tax both in 2021 and 2022.
Yes, you can add the interest and taxes to the basis of investment property under section 266. You will have to make a statement on your taxes under Section 1.263(a)-3(n).
According to Cornell Law School:
(b) Taxes and carrying charges.
(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
(d) Other necessary expenditures,
paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property, up to the time the development or construction work has been completed. The development or construction work with respect to which such items are incurred may relate to unimproved and unproductive real estate whether the construction work will make the property productive of income subject to tax (as in the case of a factory) or not (as in the case of a personal residence), or may relate to property already improved or productive (as in the case of a plant addition or improvement, such as the construction of another floor on a factory or the installation of insulation therein).
To do so:
"ELECTION TO CAPITALIZE CARRYING COSTS
For the tax year 2022, taxpayer hereby elects under Code Section 266
and IRS Regulations 1.266-1 to capitalize, rather than deduct, property
taxes on property:
County Of TurboTax amount paid $x,xxx.xx"
Keep for your records and basis information.