Should you revisit your decision to capitalize carrying costs?

With the Tax Cuts and Jobs Act taking effect in 2018, it may make sense to revisit your decision to capitalize real estate taxes, mortgage interest and other carrying costs related to investment property.

For background, a taxpayer can capitalize the following otherwise-deductible items: annual property taxes (state and local), mortgage interest (which would otherwise be subject to the investment interest limitation), and other carrying charges such as the cost of mowing and pesticide applications (which would otherwise be subject to the 2%-of-AGI floor for miscellaneous itemized deductions).

The capitalized costs increase the property’s basis, thereby reducing the gain upon the eventual sale of the property and increasing depreciation or depletion, if applicable. The election generally is considered when current deduction of these costs yields little or no tax benefit. The election does not apply to items that are not otherwise deductible. By capitalizing these costs, a taxpayer defers the tax benefit to future years when greater tax benefit may be realized.

For help navigating tax reform, understanding capitalized costs, and developing an effective tax strategy, contact your ShindelRock tax professional today.