real estate investment

While real estate tax could never be deducted as investment interest (perhaps you meant expense), you've managed to cut to the chase. Treatment of the real estate tax on past tax returns would provide evidence of intent.

Ira Smilovitz

I happen to see this thread - and have been following along...

My wife's parents vacated their home here in Chicago maybe 5 years ago, and "the kids" remodeled it over the past couple of years, and now it's been up for sale - for over a year -

What are the issues in this general discussion concerning gains/losses - ? ie - If you sell the house - what different shcedules "could" it appear on ?

I agree.

Once you have prepared the house to be rented and put the word out that it is available for rent, it has become rental property.

you meant expense), you've managed to cut to the chase. Treatment of the real estate tax on past tax returns would provide evidence of intent.

I'm lost. If you let your parents use the house at no charge, you deduct the property taxes you paid on Schedule A. If you hold the property for investment, you deduct the property taxes paid on Schedule A. Please tell me how you can tell by merely looking at Schedule A how the property was used?

If there's a mortgage, the interest would go on the invstment intret line (subject to investment income) and not the mortgage int line.

Some people, including AMTers, might even feel like capitalizing real estate taxes.

Thanks. I meant to write investment interest. Alan's right, property tax on personal or investment property is deducted on the same line in Schedule A.

This is IRC 266.

if this is any kind of rental or emtpy investment, then why SCHED A - which is a "personal" type page shouldn't we be looking at SCHED E - which is an "investment" type page at least that's where all our commercial real estate info has been transcribed for years.

you meant expense), you've managed to cut to the chase. Treatment of the real estate tax on past tax returns would provide evidence of intent.

Thanks to everyone for all of the discussion about this question.

I'm a bit confused by this last point: exactly how would you deduct property taxes on a real estate investment other than as real estate taxes? By the way, there are no mortgage interest payments involved with the property so that is not an additional complication.

As to the timing question that was raised earlier: As soon as the parents left the place, we seriously began working on remodeling it. We did major improvement projects such as completely gutting the kitchen, removing a wall, designing and installing a new ramp at the front entrance, etc.

In your situation I don't see a clear cut answer, so let me ask you this question - IF you had paid mortgage interest on the property would you have taken a deduction for it on Schedule A to reap the tax benefits?

If you answer yes then this is personal use property and you get no loss.

If you answer no then this is investment property and you may be able to use the loss.

Be honest, and do not feel obligated to answer me here - I have no dog in this fight so it doesn't matter to me. Keep in mind that however you treat this property and especially if you treat it as an investment and claim the loss, you need to be prepared to back that up. If you aren't ready to put you left hand on the Bible and raise your Right hand to God and SWEAR in front of a judge that this was an investment . . . then you know what you should do.

And if you haven't done so already - get out your Form 1040 and look as the statement printed just above where you sign. Read it carefully. And sleep tonight knowing that signing that return is swearing under oath. Get caught later and you're facing penalties and interest and if its serious enough maybe even civil or criminal fraud. If this doesn't scare you off . . . you know what to do.

Good luck, Gene E. Utterback, EA, RFC, ABA

Nope. The interest would go on Schedule A in either case.

Ask if it goes on line 10 or 11 (personal) vs line 14 (investment.)

Actually, the tax would go ... in either case. As for the interest, the property would have to be the "one other" than the principal residence to qualify - else it goes to the 4952 first (assuming it qualifies as an investment).

Let me restate my concern: Since it has prior usage (as personal use), one generally must take an affirmative action (not a passive one by doing nothing) to change its character. Simply letting it be an "investment property" by doing nothing (i.e. a lack of action) is not an affirmative change in use.

Tell me how you would prove that it's not personal use anymore.

I would write a letter to the IRS saying "I am electing to treat the property at xxxx as investment property". If I'm in AMT the statement will be "I am electing to treat the property at address xxxx and cleaning fees as investment property and electing to carry property tax as a carrying charge per IRC 266. Mortgage interest will be deducted as investment interest".

You would have to provide me a citation regarding your statement about "must take an affirmative action". As far as I know the IRS/Treasury has never addressed this issue. That being said, I would argue that when you don't list the home for rent and you don't let anyone use it to live in for four years, you have taken an affirmative action to convert it to investment property.

affirmative

And if I were still an IRS agent, I'd say that it's STILL personal use and that nothing (other than Schedule A items) are allowable.