Property tax deduction on investment vacant land ABOVE the $10k SALT limit?

[DixiePablo]

Hello. I own vacant land for investment purposes. I have read several articles that property tax paid on vacant investment land is deductible ABOVE the $10,000 SALT limit. Where on TurboTax can I enter investment vacant land property tax as a deduction ABOVE and beyond the $10,000 SALT limit. Thank you.

[JohnB5677]

Yes, property taxes paid on vacant land are deductible if you itemize your deductions.

This will be posted to:

1. Deductions and Credits
2. Your Home
3. Property (Real Estate) Taxes
4. Yes, Did you pay property or real estate taxes in 2020?
5. Enter the property taxes you paid in 2020

As you stated the SALT (State and local taxes) deduction is limited to $10,000 for 2018.

[DixiePablo]

Hi, I have read that property tax for investment land can be deducted ABOVE the $10k SALT limit (I am at the $10k SALT limit via property tax on my home as well as state income tax).

Where on TurboTax can this deduction - above the $10k limit - be entered?

[JohnB5677]

There is a bill that has been passed by congress that would increase the SALT value to $20,000.  The senate will now have to consider it.

Key points of bill 218-206

• The “Restoring Tax Fairness for States and Localities Act” would eliminate the $10,000 limit on state and local tax deductions for 2020 and 2021.
• On Thursday, the House narrowly voted to pass the bill, 218-206, largely along party lines. The measure is unlikely to make it through the Senate.
• This bill calls for increasing the SALT-cap to $20,000 for married couples filing jointly in 2019, as well as raising the highest marginal tax income tax rate to 39.6%.

[MikeinSC]

I have read the same.  Here is one article that states this logic.

I have looked in TT and cannot see where this can be input - as in this article where it states you should show the amount on Line 6 Sch A - Other taxes.

[KrisD15]

As stated in the article you referenced, if you claim to be a land developer you could deduct the tax as an expense, however, there are a few drawbacks. 

If audited, you would need to show that you are in fact a developer, generating revenue in more than just one single year (the year you sell the property). 

You would need to file a Schedule C since your business is land development. (Or some other business entity)

The gain on the sale of property would no longer be a Capital Gain, rather business income and taxed as such, including Self-Employment tax on the profit if applicable (Schedule C).

Normally, land is held and sold by an individual to produce a capital gain. In this case, taxes paid would only be allowed on that Taxpayer's Schedule A and included in the 10,000 SALT limit. If held long term, the tax on the Capital gain could be 0.

@MikeinSC

[MikeinSC]

The article specifically mentions claiming this on Sch A, not Sch C.

"One of the activities described in Section 212 is the “management, conservation, or maintenance of property held for the production of income.” This section further states that “income” includes prior, current and subsequent years.  It also states that “income” includes not only recurring income but also gains from the disposition of the property. Most real estate investors purchase property with the intention of selling it in the future at a gain. So, it appears that property taxes paid on real estate investment property would not be subject to the $10,000 cap. 

Taxes paid on investment property should be reported as “Other Taxes” on Line 6 of Schedule A, Form 1040."

[DaveF1006]

Yes, you will report this as personal property taxes on the Schedule A.

1. Log into Turbo Tax
2. Federal>deductions and credits>Property (Real Estate) Taxes.
3. You will continue through the section until you reach a screen that says Enter the property taxes you paid in 2020
4. You will enter the taxes for the vacant land in the box that is entitled Additional homes or land

[DixiePablo]

Hi, when using that entry, that tax number is included in the $10k SALT maximum limit. Please read my question again.

[DaveF1006]

Be sure when you read these articles, they are from credible sources. Please read some of the comments in this Turbo Tax link. My position is that it is vacant land, not income producing, and held as a capital asset for investment purposes. This is a property tax on personal real estate that is subject to the Salt restriction.

[MikeinSC]

I discussed this with two practicing CPA's who are with large firms, both agree it is not subject to the $10,000 limit and a Schedule A other tax deduction.  

How to get it to work in TT is the question.

[Cynthiad66]

Individuals who own vacant land generally do not receive any income from the land and also are not entitled to any business deductions related to it. The real estate taxes paid on vacant land, before the passing of the Tax Cuts and Jobs Act, were an itemized deduction on Schedule A.

Taxes paid on investment property should be reported as “Other Taxes” on Line 6 of Schedule A, Form 1040. One note of caution, however, is that taxes are not a deduction for Alternative Minimum Tax purposes. Depending on the situation, including these additional tax deductions may not result in any less Federal Income Tax being owed. In those situations consideration should be given to making an election under Section 266 to capitalize the taxes paid to the basis of the property, thus reducing the amount of capital gain once the property is sold. 

[juck40]

I have owned a vacant lot for 37 years and paid property taxes each year but did not get a deduction of the tax on my tax return. When I sell the lot can the taxes I have paid but not deducted for 37 years be added to the basis of the property?

[Mike9241]

under IRC 266 and REG 1.266-1 an anuual election was required to treat the taxes as part of the capital cost.

A taxpayer who owns unimproved and unproductive real estate can elect to capitalize annual taxes, interest on a mortgage, and other carrying charges.

• The election must be made annually with the original return.
• The election requires a statement in the taxpayer's return describing the property and the expenses to which the election applies.

at best if you have not yet file the 2022 return you could make the elction for the 2022 taxes (prior year's are lost). 

[Hal_Al]

Q. I have owned a vacant lot for 37 years and paid property taxes each year but did not get a deduction of the tax on my tax return. When I sell the lot can the taxes I have paid but not deducted for 37 years be added to the basis of the property?

A. No.

Real estate tax is/was only deductible as an itemized deduction.  If you used the standard deduction, in the past, then you wouldn't have gotten any benefit. 

However, If the property was classified as investment property, as opposed to personal use property, alternatively,  taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property  (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement. You cannot amend prior year returns to claim capitalization.