Tax, SDIRAs & Cost Segregation

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Don Darnell
  • Auburn, CA
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Adding Capitalize Carrying Costs text to 1040X cost $2000…

Don Darnell
  • Auburn, CA
Posted Nov 26 2022, 10:35

Hi, I own an unimproved lot and capitalize HOA fees and property taxes every year to increase the property basis by amending my taxes and adding something like the following "magic" text as required by the IRS:

"For tax year 2021, taxpayer hereby elects under Code Section 266 and IRS Regulations 1.266-1 to capitalize, rather than deduct HOA fees paid in the amount of $#### and $#### property taxes as carrying costs on a vacant lot that is unimproved and non-productive bare land. The lot is located: street address, city and state."

I do my own taxes using Turbotax and the software does not have the ability to upload the magic words when I file online so I file a 1040X with snail mail with no changes except for the magic text. I have been amending the returns for a number of years with no issues.

A few days ago got an IRS notice CP22A, with the notice stating the IRS made changes that I requested (1040X) and “there was a change to my investment gain or loss” and that I owe $2000 plus interest. Given the change I downloaded the various transcripts from the IRS expecting to see the updated Schedule D changes, but the amounts for short term and long term stock sales was the same plus my taxable income was the same as my initial return. Checking the IRS tax tables for my taxable income and the number matches what Turbo tax listed.

I called the IRS and spent hours waiting and finally talking with multiple agents. The staff was friendly, but could not point to why I owed $2000 in additional taxes given they were getting the same numbers as me. In the final conversation, the agent told me to request detailed information about the charge by mail only. I have made an appointment to talk face-to-face with an agent in late December to get this straightened out.

Lastly, I recently found the following link that lets Turbotax add the magic text to your original return so you can file online and don’t have amend your taxes.

https://ttlc.intuit.com/commun...

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Basit Siddiqi
  • Accountant
  • New York, NY
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Basit Siddiqi
  • Accountant
  • New York, NY
Replied Nov 26 2022, 13:49

Yes - it would be weird that you would not be able to attach an election or a footnote to a return using any software.

The only thing I can think of is if there is no changes to schedule D and to your taxable income.
It may be possible that the software calculated the reduced long-term capital gains tax incorrectly.
It may be possible that you are responsible for another tax such as the Net Investment Income Tax(NIIT) that was not calculated on the original filed return.
Just guessing.

Best of luck with your convo with the IRS.

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Don Darnell
  • Auburn, CA
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Don Darnell
  • Auburn, CA
Replied Nov 26 2022, 20:09

Thanks Basit Siddiqi for the comments. Was not aware of the NIIT, but if I understand it our MAGI must exceed $250K for it to come into play. Our MAGI is significantly less and believe not a factor. My guess is the tax change for 2021 where the IRS introduced a new form called Qualified Dividends and Capital Gains Tax worksheet is causing some problems. As you know, the form may adjust your taxable income based on the original taxable income, your capital gains and qualified dividend income. The adjusted taxable income is then used to calculate the tax you owe the IRS, producing the value for line 16 in the 1040.

In reviewing all of the downloaded IRS transcripts, there does not appear to be a line for the adjusted taxable income, which was ultimately used to calculate the tax. Given it’s a very important number, my guess is the IRS has yet to add it to the IRS transcripts given the tax change was added in 2021.

In my case, looking up my tax using my taxable income in the IRS tax tables gives a tax that is $2000 more than what I paid. However, if I use the adjusted taxable income from the Qualified Dividends and Capital Gains Tax worksheet, that I’m allowed to do, then the tax is what I paid in my initial return.

I’m thinking the IRS software for 1040X returns did not take into consideration the Qualified Dividends and Capital Gains Tax worksheet correctly. It seems like others may encountered same the problem like the notices about math letters people got erroneously. 

Thanks again,

Don