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valley_robert
Returning Member

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

I've entered these various expenses as assets of property to avoid any depreciation schedule from being generated.  But these don't then show up in the balance sheet.  How does this asset flow into the balance sheet?  On Line 13?


2 Best answer

Accepted Solutions
tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

"As non depreciable assets, how are these added to the property basis?"

There appears to be an operational misunderstanding of sorts. Since you are capitalizing expenses which would ordinary be deducted in one tax year, you are simply spreading the cost recovery over a number of tax years (i.e., you are depreciating the expenses). 


See Treas. Reg. §1.263(a)-3(n)(2): 

(n) Election to capitalize repair and maintenance costs
....
(2).........A taxpayer making this election for a taxable year must treat any amounts paid for repairs and maintenance during the taxable year that are capitalized on the taxpayer's books and records as improvements to tangible property. The taxpayer must begin to depreciate the cost of such improvements amounts when they are placed in service by the taxpayer under the applicable provisions of the Code and regulations.....

View solution in original post

tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Yes, they are so considered and the improvements are added as assets to the property to which they relate (at which point their cost is recovered incrementally rather than all in one taxable year).

View solution in original post

18 Replies
tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

"As non depreciable assets, how are these added to the property basis?"

There appears to be an operational misunderstanding of sorts. Since you are capitalizing expenses which would ordinary be deducted in one tax year, you are simply spreading the cost recovery over a number of tax years (i.e., you are depreciating the expenses). 


See Treas. Reg. §1.263(a)-3(n)(2): 

(n) Election to capitalize repair and maintenance costs
....
(2).........A taxpayer making this election for a taxable year must treat any amounts paid for repairs and maintenance during the taxable year that are capitalized on the taxpayer's books and records as improvements to tangible property. The taxpayer must begin to depreciate the cost of such improvements amounts when they are placed in service by the taxpayer under the applicable provisions of the Code and regulations.....

View solution in original post

valley_robert
Returning Member

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

So are these deferred expenses considered assets?  How are they accounted for so that they can be added to the basis of the property when it is sold?
tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Yes, they are so considered and the improvements are added as assets to the property to which they relate (at which point their cost is recovered incrementally rather than all in one taxable year).

View solution in original post

KPDualie73
Level 1

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Where do I find the form online?

Critter-3
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

There is no "form" ... a statement is simply attached to the return and it is reflected in your bookkeeping records.   The statement cannot be efiled when using the TT system. 

 

Per the IRS :  

 

Election to Capitalize Repair and Maintenance Costs

To reduce the difficulty with applying the facts and circumstances analysis to identify the tax treatment of costs and to recognize simpler administration by permitting you to follow financial accounting policies for federal tax purposes, the final tangibles regulations include an election to capitalize repair and maintenance expenses as improvements, if you treat such costs as capital expenditures for financial accounting purposes.

You may elect to treat repair and maintenance costs paid during the taxable year as amounts paid to improve property if you:

  • Pay these amounts in carrying on a trade or business; and
  • Treat these amounts as capital expenditures on your books and records regularly used in computing your income.
  • Make the election to capitalize for each taxable year in which qualifying amounts are incurred by attaching a statement to your timely filed original federal tax return including extensions for the taxable year that the amounts are paid.
    • If you make the election to capitalize repair and maintenance expenses, you must apply the election to all amounts paid for repair and maintenance that you treat as capital expenditures on your books and records in that taxable year. For more information see When and how do you make an election provided under the final tangibles regulations?
    • An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop capitalizing repairs and maintenance costs for a subsequent year.

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#El...

KPDualie73
Level 1

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

I may not have been quite clear enough.  It is not for my business but for personal unimproved property.  I want to capitalize the property taxes.  Do I just follow your recommendation to make a statement as such?

KPDualie73
Level 1

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

In the 2019 and 2020 return, there is a form for doing this.  It is Section 1.263(a)-3(n) Election to Capitalize Repair and Maintenance Costs.  Is this new in TurboTax?  It doesn't specifically say Carrying Costs or Taxes.

Critter-3
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Personal unimproved property cannot be capitalized however if you are holding it as an investment to sell later then you can attach a statement to your return. 

 

This is NOT the same as the de minimus safe harbor option in the depreciation section ... you will NOT be entering the taxes you want to capitalize  as assets or expenses anywhere on the return ... it only goes on the statement you send. 

Critter-3
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Here is where you are mixed up ... close but not the same ...

 

De Minimis Safe Harbor Election-  IN THE PROGRAM interview
The regulations provide a $500 safe harbor amount for most businesses to deduct expenditures that
otherwise require capitalization (or $5,000 for businesses with an Applicable Financial Statement)
[Reg. 1.263(a)-1(f)]. The FAQs clarify that the $500 or $5,000 limits are not intended as a ceiling on the
amount that can be deducted as a business expense. For example, a business may have much larger
expenditures for incidental materials and supplies such as fuel, and those expenditures remain fully
deductible. The guidance states that “the de minimis safe harbor is simply an administrative
convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition
or production of property that otherwise must be capitalized under the general rules.”
The guidance reminds that the treatment under the de minimis election for tax purposes must be
consistent with expensing on the books and records of the business.
A new development in the FAQs relates to the ability to elect the de minimis safe harbor for items
costing $500 or less, but also to maintain an internal policy to deduct a greater dollar amount.
Previously, most commentators had assumed that an election to adopt the $500 de minimis amount
precluded the use of a larger internal expensing policy (e.g., a policy to expense all asset acquisitions
under $1,000). In fact, the FAQs advise taxpayers using a larger de minimis policy to still elect the
$500 safe harbor in order to protect those smaller expenditures from any IRS exam dispute. This
suggests that virtually every business return should add the de minimis expensing election, and do so
annually.
The de minimis election is made by attaching a statement to the tax return. The statement must be
titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer's name,
address, taxpayer identification number, and a statement that the taxpayer is making the de minimis
safe harbor election under §1.263(a)-1(f).

 


Election to Capitalize Repair and Maintenance Costs - IN THE PROGRAM but accessed only thru FORMS mode
There are circumstances in which taxpayers would rather capitalize repairs for tax purposes. The IRS
FAQs remind that Reg. 1.263(a)-3(n) permits an election to capitalize repairs and maintenance as
improvements, if these costs are treated as capital expenditures for financial accounting purposes (or
as the regulations state “on its books and records regularly used in computing income”). The election
is made by attaching a statement to the timely filed original federal tax return stating that the
taxpayer is electing to capitalize repair and maintenance costs that have also been capitalized on its
books and records. As an annual election, it is not an accounting method and does not need to be
applied consistently.
The statement to make this election must be titled “Section 1.263(a)-3(n) Election” and include the
taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is
making the election to capitalize repair and maintenance costs under §1.263(a)-3(n).

 

https://www.claconnect.com/WorkArea/DownloadAsset.aspx?id=18678#:~:text=Election%20to%20Capitalize%2...).

tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?


@Critter-3 wrote:

Election to Capitalize Repair and Maintenance Costs - NOT IN THE PROGRAM 


The election form is actually in the program but can only be accessed via Forms Mode (which is obviously not available in the online versions). The user then has to choose the method of recovery for the capitalized amounts.

 

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Critter-3
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

@tagteam    Thanks for the update ... don't use the downloaded program often.  Nice they added it. 

AmeliesUncle
Level 12

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?


@KPDualie73 wrote:

It is not for my business but for personal unimproved property.  


That is not the 1.263(a)-3(n) election.  You are looking for the 1.266-1 election.  That must be done every year.  I strongly suspect that is not in TurboTax, and you would need to manually make the statement and attach it your mailed tax return.

tagteam
Level 15

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?


@AmeliesUncle wrote:

@KPDualie73 wrote:

It is not for my business but for personal unimproved property.  


That is not the 1.263(a)-3(n) election.  You are looking for the 1.266-1 election.  That must be done every year.  I strongly suspect that is not in TurboTax, and you would need to manually make the statement and attach it your mailed tax return.


This is what typically occurs when a user tacks posts on to an existing thread; confusion ensues.

 

Regardless, the 1.266-1 election form only exists in the Business edition, not in any of the personal editions of TurboTax so, as stated, either the additional information form or miscellaneous form must be used for that purpose.

m00ntan
Level 3

I'm electing 1.263(a)-3(n) capitalization for real estate expenses. As non depreciable assets, how are these added to the property basis?

Thanks, so the answer to where is the election for 1.263(a)-3(n) is it's not in Home and Business.  I'm looking for something that's not there.

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