If you own unimproved vacant land for investment, you may be able to capitalize the costs of loan interest expense, real estate taxes, insurance, HOA fees, and other maintenance expenditures under the IRS Section 266 election. The 266 election is only available for unimproved property in years where there is no income generate by the property.
Typically, costs associated with land held for investment could be deducted in the year incurred; however, by choosing the 266 election, taxpayers capitalize the carrying-costs associated with the property. By capitalizing these costs, rather than deducting them during the tax year, you are adding those expenses to the cost of the property. Therefore, when selling the property, you will lower your capital gain (or create a greater loss) on your taxes. In addition to lowering the potential capital gain, the option to capitalize interest expense if beneficial to many taxpayers without realized investment income. Investment interest expense is only deductible when offset against investment income; however, with the 266 election it can be capitalized and used to offset future gain upon sale.
Taxpayers must annually elect to capitalize the carrying costs associated with their investment property. Different expenses can be deducted or capitalized as appropriate; however, piecemeal deductions are inappropriate. The same expenditure cannot be partially deducted and partially capitalized. Additionally, if you chose to forgo the 266 election in prior years, you may not be able to amend your returns to reflect a capitalization of prior years’ expenditures.