Where to deduct investment property tax?

[Anonymous]

Where / how do I deduct investment real estate property tax?  I understand this real property tax is not limited to the $10,000 cap, but not sure where to show it.  Sch A? Sch E?  I am not a real estate dealer, just bought property that I expect will increase in value and not currently renting it out.  It's just sitting there for now.

[tagteam]

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@Anonymous wrote:

Sch A? Sch E?  I am not a real estate dealer, just bought property that I expect will increase in value and not currently renting it out.  It's just sitting there for now.

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Schedule A, but there is a $10k limit. 

See https://www.irs.gov/instructions/i1040sca#idm140545383471856

If you are above the limit, you could consider capitalizing the property taxes.

See https://www.irs.gov/publications/p551#en_US_201812_publink1000256944

[Hal_Al]

It depends on what you mean by "investment real estate property".  If it is active rental property, then it goes on Schedule E.  If it is unproductive or vacant property being held for appreciation, then it goes on Schedule A , line 5b and subject to the 10K total limit.

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 The carrying costs (e.g.  repairs, insurance & utilities) of investment property are not deductible, staring with tax year 2018. Real estate (property) tax may be deducted on schedule  A.

Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (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 may add the carrying costs, incurred in the year of sale, to your cost basis. 

Mortgage interest is only deductible to the extent of other investment income and not subject to the 2% of AGI rule,  but can be capitalized. 

You cannot amend previous year returns to  to claim capitalization.  (see https://ttlc.intuit.com/community/tax-credits-deductions/discussion/is-it-possible-to-amend-taxes-fo... )

Prior to 2018, carrying costs could alternatively be deducted as investment expenses, a misc. itemized deduction subject to the 2% of AGI threshold. So, filing  amended returns for earlier years is an option, for that. 

[Anonymous]

Why does Nolo say "An investor can also deduct property taxes paid on a vacant land as a personal itemized deduction on Schedule A. This deduction is not limited to the amount of net investment income. Nor is it subject to the $10,000 annual limit on deducting property tax paid on a main or second home."

[Anonymous]

Why does Nolo say "An investor can also deduct property taxes paid on a vacant land as a personal itemized deduction on Schedule A. This deduction is not limited to the amount of net investment income. Nor is it subject to the $10,000 annual limit on deducting property tax paid on a main or second home."

[tagteam · Accepted solution]

That is probably because of IRC §164(b)(6):

(6) Limitation on individual deductions for taxable years 2018 through 2025

In the case of an individual and a taxable year beginning after December 31, 2017, and before January 1, 2026—

....

(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).

The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212.

So, the issue is whether or not holding vacant land as an investment is a Section 212 activity and there are divergent opinions on that. If you believe it is, and want to take the deduction, then it is probably best to enter it on Line 6 of Schedule A. With respect to the position of the IRS, do not be surprised if they disagree with your position.

[Critter]

They are wrong ... ask them to site the IRS rev code they are referring to :  https://www.nolo.com/legal-encyclopedia/tax-deductions-vacant-lands.html

Overall Limit   https://www.irs.gov/taxtopics/tc503

Your deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately). You may be subject to a limit on some of your other itemized deductions also. Please refer to the Form 1040 Instructions (PDF) and Topic No. 501 for the limitations.

[Anonymous]

Holding land for investment (held for the production of income) very well seems to fit IRC 212 - as would any property held for income, not just raw land, as 212 says:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

[Hal_Al]

"This deduction is not limited to the amount of net investment income."

Nolo appears to be comparing the RE tax deduction to the ability to deduct interest (mortgage or other).  The interest deduction is limited to investment income. The RE tax deduction is not.  But a separate provision limits the RE tax deduction to $10K.

[Carl]

I understand this real property tax is not limited to the $10,000 cap

It depends. If it's rental property that is used to produce income (which gets reported on SCH E) or business property used in a business you own (which gets reported on SCH C) then it's reported as the asset it is on the schedule for the type of business property it is, and there's no limit.

However, if it's property that you purchased and do not use to produce active or passive income, that may be subject to the SALT limits then.

[rjskal]

I wouldn't be so sure about that, Critter.  Treas. Reg. Section 1.212-1(b) states, “The term income for the purpose of Section 212 includes not merely income of the taxable year but also income which the taxpayer has realized in a prior taxable year or may realize in subsequent taxable years; and is not confined to recurring income but applies as well to gains from the disposition of property.”

[tagteam]

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@rjskal wrote:

....Treas. Reg. Section 1.212-1(b) states.......not confined to recurring income but applies as well to gains from the disposition of property.”

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I tend to agree, but I am absolutely not convinced the IRS would take the same position if deducted on Line 6 of Schedule A.

Regardless, with respect to vacant land held for investment, personally, I would simply make a Section 266 election and capitalize my costs (not only is it the safe, conservative, approach, it provides for capturing all costs, not just property taxes).