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To clarify I mean my favorite tax election.
For me, a popular choice is the IRC section 266 election to capitalize carrying costs. Many times you may have a current year expense that while technically deductible in the current year does not provide you any current year tax benefit. In such cases the IRC 266 election, if available to you, allows you to capitalize certain expenses thereby increasing the basis of certain land and thus the election means you may have reduced taxable gain at the point in the future when the land is sold. Think property taxes, interest, maintenance and other carrying costs on undeveloped land you or your business is holding for investment purposes.
The below link is to an article by Dr. James R. Hasselback, a retired tax professor, may be a worthwhile read if you own undeveloped land.
http://www.jrhasselback.com/Blog/CarryingCosts-Outline.pdf
Best, Bill
Bill, thanks for your post and the linked detailed article. I actually have a part interest in an unimproved lot and years ago a CPA told us about Sec. 266.
Some years we have income from the lot, but he taught us how to do the Sec. 266 Election Statement in the years we don’t. That’s a form I don’t think any of the tax prep software programs includes!
In the Lacerte program I use when working part time there is a generic election screen where the preparer has to type the entire 266 election. Lacerte has most of the common elections available but the 266 election is a bit more work.
I have not used the popular turbo tax program for a number of years but a google search seems to indicate that a 266 election is available.
My search results for turbo tax on 266-
Go to Screen 46, Elections.
Scroll down to Election to Capitalize Taxes & Carrying Charges section. Check the box Capitalize taxes and carrying charges [266]. Complete the other 3 inputs in this section. To create multiple elections, click Add in the left navigation panel and repeat step 2 through 4.
For other tax software I would be looking for an elections tab.
So many writing on HD bring experience and expertise on practical financial applications as you often do.
If the software has a depreciation section I like to record the unimproved land cost and any IRC 266 costs as part of land cost to create a tracking of all such costs. When a sale eventually occurs the tax programs I have used allow a “mass sale” where the various accumulated costs can be reported as part of the sale on the appropriate place in the year of sale. If no tracking of basis in the software then the 266 election and supporting detail goes the into a permanent file for future tax years. If your preparer is not young and is not around when a future sale occurs the basis in the preparer’s permanent file may be lost so the taxpayer’s best practice is to independently keep copies of 266 elections and basis.
If the owner dies owning the property then the beneficiary(s) get a stepped up basis and the work electing the capitalized 266 costs has been wasted effort.
Thanks for commenting.
Bill, thanks for your reply and info. I actually used FreeTaxUSA for our most recent return (on the recommendation of Marjorie and Dan). I didn’t check if it might include, under “elections”, a way to do a Sec. 266 statement since we had income from our lot last year (and so took deductions on Sched. E). But I will definitely look for this in future years without income.
We don’t have any land other than our primary residence, but this is good for those it can help. I didn’t know about IRC Sec 266 election. Thanks. Chris