Itemizing Deductions: Capitalizing Property Taxes

Posted by Lee Reams Sr. on

When itemizing deductions, a taxpayer is allowed to deduct a variety of taxes, including real or personal property taxes and state income or sales taxes. However, for alternative minimum tax (AMT) purposes, none of these itemized taxes is deductible. For most taxpayers, taxes represents one of the largest tax deductions, and it frequently triggers the AMT.

For taxpayers affected by the AMT, conventional wisdom dictates deferring tax payments to a subsequent year (when the AMT may not apply). When deferring such payments, care should be exercised to avoid late-payment penalties and interest on underpayments.

In addition, taxpayers who are affected by the AMT or who are simply taking the standard deduction can annually elect to capitalize the taxes that they paid on unimproved and unproductive real estate. This means forgoing the deduction and adding the amount of tax paid to the real property’s cost basis (Reg Sec 1.266-1(b)(1)).

To make this election, the taxpayer must file a statement with the original return for the year of the election; this statement must specify the item(s) that the taxpayer has elected to capitalize (Reg Sec 1.266-1(c)(3)).