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As the above title says, would I have to prepare a balance sheet for this scenario:

Multiple family members inherited a property, the estate attorney created a partnership about 10 yrs ago, the housing market in 2019 was great and they decided to sell, the attorney has provided the setup basis from 10yrs ago, and also has kept records of all the cost of maintaining the property over the years (will be capitalized and added to the basis).  So in 2019 it will be an initial return just showing the sale, however the revenue/asset exceeds the $250,000, is it necessary to prepare the Sch L?   Since they didn't close the bank account until 2020 and there was a small amount of interest, the final return will be in 2020.   Yes or No on this BS scenario.

Thanks

 

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Let’s say I put the house as an asset in 2019, it was sold in 2019, so the asset information disappears from the balance sheet:

 

stepup basis: 200,000

2009 to 2019 expenses: 100,000

Adjusted Basis: 300,000

Sales Price:  290,000
 

Loss -10,000

cash in bank 5,000

Difference 15,000

Where do you plug the 15,000 difference to balance?

 

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“the attorney has provided the setup basis from 10yrs ago, and also has kept records of all the cost of maintaining the property over the years (will be capitalized and added to the basis). “

There was no expense deductions at all, everything will be reported in 2019.

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Since the house was never rented, it is treated as investment property for tax purposes.  Operating expenses are never capitalized.  For individuals, real estate taxes can be capitalized but an election to do so must be made each year.  If the rule is the same for partnerships, the best they can do is deduct any RE tax paid at the closing in 2019.  Their basis is $200k, period.

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3 hours ago, ILLMAS said:

I am going to say an a yearly election was never made, plus the house was never a rental, don't know if that makes a difference now?

It is treated as investment property and covered by a sect 266 election.  Since the returns for those years have never  been filed,  you might be in luck.

Reg 1-266-1(c) states that the election has to be made with an original tax return, there is no reference that the return must be timely filed.  Pub 535 also state the election must be made with an original return or if an original return has been filed, the election can be made with an amended return filed within  6 months of the due date without regards to extensions.

So it appears that since your client's partnership has never filed any tax returns, those years are all open and original returns can be filed to make the election.

However, you need to consider the effect of TCJA for years beginning after 2017.  An election for sect 266  only covers otherwise deductible expenses.  That limits the election to $10,000 of property taxes for years after 2017; and also eliminates the election for carry charges subject to the suspension of misc itemized deductions.

Unless I am overlooking something, it looks like you can file a 1065 to make the 266 election for each open year and increase the basis (subject to TCJA for 2018 and 2019). 

$100,000 increase in basis should be well worth your fee for some basic returns to make the election per the reg and IRS pub.

In situations where the election was omitted on original returns, PLRs have ruled favorably for taxpayers that were not advised of the 266 election, but that does not appear to be the case here.

 

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Dan, I was thinking the same thing. File the returns to make the election.  I'd also put a statement on the return that indicates the partnership had no activity that actually required a return be filed so that the IRS doesn't try to assess late filing penalties. 

ILLMAS, if you, or anyone else, would like a more complete reading of this under sec 266, this article from The Tax Advisor is a pretty good one.  It also reminds us that with more people claiming the higher standard deduction, this election should be considered because the taxpayer can still benefit by adding real estate taxes and interest to basis that would otherwise be lost.

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Thanks for sharing the link.  Note that carrying costs pertain to costs while the property is being developed or improved, not day-to-day grass mowing.  It looks like only the taxes can be capitalized and nothing else in this case.  This leads me to wonder how those costs were paid.  Did the partnership also have a cash account?  The attorney surely was paid (surely!), and that is a deductible expense in the year paid.

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1 hour ago, Sara EA said:

It looks like only the taxes can be capitalized and nothing else in this case. 

That would be the case in tax years beginning after 2017 thanks to TCJA.

Prior to that, expenses that are ordinary and necessary to maintain the investment property under section 212 can be capitalized through a section 266 election.

I believe that would include insurance, utilities, lawn maintenance....etc.

1 hour ago, Sara EA said:

The attorney surely was paid (surely!), and that is a deductible expense in the year paid.

and since it was incurred for the management, conservation or maintenance of the investment property, it is a section 212 expense eligible for the 266 election.

The basics of the 266 election in this case are to capitalize expenses that would otherwise be deductible to the partners as misc on Schedule A.

Since the house was not held as a rental, the legal expenses are not deductible above the line.

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