Question

Interest expense on an investment property that will be sold

Forum|Forum|6 years ago
May 19, 2020
1 reply
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This year we received a 1098 copy B for a construction loan. The 1098 has boxes 1,2,3,8 filled out.

We took out a construction loan in 2017 to build a townhome for selling when it is completed.
We have been paying interest on the loan since then.
As the builder spends more money the load amount increases thus our interest increases.
The property just got completed in 2020 and it is now up for sale.

1) Can we deduct interest against this property without income or realized capital gain?
2) The load started in 2017 and we did not deduct any interest or count it as an expense in 2017 or 2018. Can we deduct that interest/count it as an expense in 2019 or do we have to wait until 2020 as that is when the completed townhouse went up for sale?
3) Is the tax year when we can take action based on the townhouse being available or when it is sold?
4) This investment was with another party but the load is in my name. How should we handle the proportional interest expense?
5) How do we enter the above in TurboTax in whatever year(s) we can take action? We aren't flippers. This is our only property like this.

Hal_Al

Employee

Simple answer: you need professional tax help, not do it yourself software.

That said, there are several issues.

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, under taxes, without regard to the old 2% rule.

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.

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

Real estate (property) tax may be deducted on schedule A, under taxes, without regard to the old 2% rule.

Is this really an investment or is it business activity. Is this a partnership.