Salvaging Investment Expenses under the Tax Cuts and Jobs Act

Investment expenses that have traditionally been deducted on Schedule A as a miscellaneous itemized deduction subject to the 2% limit of adjusted gross income will be lost during the 2018-2025 income tax filing years if a Section 266 Election is not made. The complete category of these miscellaneous itemized deductions has been eliminated for this period of time under the Tax Cuts and Jobs Act (TCJA) passed in 2017.

There are three distinct categories of investment related expenses which can be deducted in various ways. 1. Property taxes can be deducted as investment expenses for taxes (and are not subject to the $10,000/$5,000 Schedule A tax limit imposed by TCJA.) 2. Investment interest is deductible (subject to investment income limitations.) 3. Other investment expenses such as “carrying costs” for real estate like mowing, maintenance, utilities. These would all flow through the Schedule A and with new higher standard deduction amounts, many taxpayers would get -0- benefit from any of the three categories. Additionally since category 3 would be deducted under the miscellaneous deductions that have been eliminated by TCJA, no taxpayer will receive any benefit from those as current deductions.

There is an election under IRC Section 266 whereby the taxpayer can elect to add any or all of these expenses to the basis of the property and even though they will not get a current year deduction, these costs will add to the basis of the property and will affect the gain or loss on the eventual sale of the property. This election can be made for one or all categories and can be made for one or all properties. This election is made each year and one year’s election has no impact on how the expenses are handled in any subsequent year. This election must be made on the original return. Contact us at 1-866-287-9604 for more information.

Posted by Tim Eldridge, CPA