I incurred cost to rezone property & was unsuccessful. Can I now expense cost for design plans, engineering, & legal as research/experimental since they cannot be used?

Forum|Forum|6 years ago
June 1, 2019
4 replies
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Tax code seems to indicate that I must add this cost to my basis. We've owned the property for 40 years and have been unsuccessful in marketing it as commercial property. We paid engineers and architects to design a building. We paid for professional fees to help support a zoning change that would permit the new plans... The zoning change was denied and now the project has been abandoned. It seems that I should expense because the costs incurred no longer add value to the property.

Best answer by Hal_Al

It's actually your option.

The carrying costs (e.g. insurance & utilities) of investment property and other expenses, such as you described, are deductible as investment expenses, but are subject to being a misc. itemized deduction also subject to the 2% of AGI threshold.
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 are correct, had the project gone thru, those cost would have to have been capitalized (added to your basis).

Real estate (property) tax may be deducted on schedule A, under taxes, without regard to the 2% rule. 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. (http://www.nolo.com/legal-encyclopedia/tax-deductions-vacant-lands.html)

Critter

Employee

What kind of property is this ? Just land kept for investment? Do you have any income from the property and if so what tax form is it reported on?

Critter

Employee

Hal Al answer is valid.

V

Very-privateAuthor

Employee

It has been held for sale for 40 years (very low basis) But we develop rental prop also.. We have some income as a result of a partial sale to the city under their imminent domain projects. But only a portion of basis was allocated to that forced sale.. The zoning change was an attempt to recover lost market value.

The income will be on a K1

Hal_AlAnswer

Employee

It's actually your option.

The carrying costs (e.g. insurance & utilities) of investment property and other expenses, such as you described, are deductible as investment expenses, but are subject to being a misc. itemized deduction also subject to the 2% of AGI threshold.
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 are correct, had the project gone thru, those cost would have to have been capitalized (added to your basis).

Real estate (property) tax may be deducted on schedule A, under taxes, without regard to the 2% rule. 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. (http://www.nolo.com/legal-encyclopedia/tax-deductions-vacant-lands.html)