Can’t itemize then capitalize

You just found out that you can’t itemize, or the real estate taxes you paid are subject to the $10,000 deductible limitation. Maybe you can preserve some of those nondeductible expenses to offset future taxation. A little-known fact is that the IRS allows taxpayers to make an election to capitalize carrying charges of undeveloped land and the costs to develop land and buildings.

Carrying charges are the taxes and interest you pay to carry or develop real property or to carry, transport, or install personal property. Certain carrying charges must be capitalized under the uniform capitalization rules. You can elect to capitalize carrying charges not subject to the uniform capitalization rules, but only if they are otherwise deductible.

You can elect to capitalize carrying charges separately for each project you have and for each type of carrying charge. For unimproved and unproductive real property, your election is good for only one year. You must decide whether to capitalize carrying charges each year the property remains unimproved and unproductive. For other real property, your election to capitalize carrying charges remains in effect until construction or development is completed.

What that might mean for you is, if you have been itemizing the real estate taxes you pay on a piece of land but now can no longer itemize due to the new tax laws or you are limited to $10,000 of taxes, you can capitalize those costs of “carrying” the property and include it in your cost basis. The benefit to you is you have not lost the deduction, but rather preserved it to reduce the capital gain when you sell the land. If you are building a home, you can elect to capitalize the cost of real estate taxes and the interest on the loan and include that in your cost of home construction.

How to make the election. To make the election to capitalize a carrying charge, write a statement saying which charges you elect to capitalize. Attach it to your original tax return for the year the election is to be effective. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the statement to the amended return and write “Filed pursuant to section 301.9100-2” on the statement. File the amended return at the same address you filed the original return.

If you were deducting real estate taxes and interest expense on undeveloped land, consider capitalizing those costs if you can no longer itemize.  Refer to IRS Publication 535.

Ronda Kilanowski is a certified public accountant with Malone, Dirubbo & Company, PC.