Can I use the Section 266 election for the nondeductible portion of my state and local taxes?

by Nicholas J. Crocetti, CPA | Sep 07, 2018

Under the new tax law, local taxes are deductible only up to $10,000. This includes state, city, and real estate tax. I've drafted my 2018 taxes, and my total for those is $14,000. Can I use the Section 266 election for the remaining $4,000? I understand this an option for taxpayers to charge certain taxes and other expenses to a property’s capital account rather than currently deduct those taxes. Such charges would then be added to the taxpayer’s basis. Please advise.

The first question to be answered is the ordering rules for “taxes deduction.” What is deductible to reach the $10,000 limitation as an itemized deduction? Are income taxes deducted first? Are sales taxes deducted first? Or are the real estate taxes deducted first? Perhaps a proration is utilized to meet the threshold.

The second item of issue are the actual real estate taxes incurred. If they are business or investment real estate taxes, they should properly be associated with the related business or investment activity. As personal real estate tax for one’s home or second home, Section 266 only permits the capitalization (and the addition to basis) for those costs incurred during the development or construction period. All other real estate taxes are deemed to be from normal operations, thus not capitalizable. (Please note that Section 266 refers to a capital account.)

I would suggest that you further explore your issue with a CPA.

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Answered by: Nicholas J. Crocetti, CPA, is director of tax advisory solutions with CBIZ Inc. in Plymouth Meeting, Pa.

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