Can we deduct past property taxes as part of cost basis on the sale of second home? Never previously deducted property taxes on it.

[sih58]

We purchased the property in 1991 and just sold it in 2017.  We have always filed using the standard section, so never previously deducted these property taxes.  Just need to know if we can use it the past property taxes to increase the cost basis and reduce our capital gains, 

[CarolynM · Accepted solution]

No, you can only claim the deduction for taxes paid in the current year. This is not an expense to add to the cost basis.  

To calculate the cost basis of the second home, you can add improvements you made in the prior years, but not the taxes. Even if they were not claimed, they would be maintenance. 

For more information on qualifying home improvements, follow this link: Home Improvements and Your Taxes

[mcsinkking]

CarolynM,

I don't think your answer is complete. I think we can add property taxes to the cost basis in certain situations (including vacant land) if we elect to capitalize those property taxes each year instead of deduct them. That election (to capitalize property taxes and add them to the cost basis, rather than deduct them) would certainly make sense for years when the taxpayer uses the standard deduction instead of the itemized deduction, or for years when the taxpayer did not deduct that year's property tax for some other reason. I don't know if that same option (to capitalize rather than deduct) is available for second homes in addition to vacant land (since the original poster asked about a second home).

I'm basing my response on this information: https://www.taxaudit.com/tax-audit-blog/can-i-deduct-all-real-estate-taxes-on-a-piece-of-land-sold

Please reply and let us know if you agree that this option (to capitalize property taxes and add them to the cost basis, rather than deduct them) is available in certain situations. If you agree, please us know all the situations when we can use that option (vacant land? second home? investment property? other types of property?).

Thank you!

[DaveF1006]

If a taxpayer owns vacant or unimproved land as an investment, there is an election under Internal Revenue Code Section 266 to capitalize expenses including property taxes. The election is made on a year-by-year basis.

 As far as i am aware of, this is the only instance where property taxes may be capitalized.

[Opus 17]

@mcsinkking 

1. You are replying to a discussion that is more than 5 years old.

2. That election is only allowed for investment property, not personal property, and only if the capitalization election was made in writing each year and attached to each past tax return.

3. That election has been disallowed for tax years 2018-2025 as a result of the 2017 tax reform law that removed the miscellaneous 2% itemized deduction.