Should I expense or capitalize post acquisition eviction costs

Question

I acquired a house in September 2010. I evicted the previous owner in December 2010. I paid the eviction costs in January 2011. I listed the house for sale in March 2011. I expect to sell the house in 2012.

The house is most likely a dealer property. Should I expense the eviction costs on my 2011 tax returns, or should I add them to the basis of the house ?

Thanks in advance,

Abdenour

Abdenour Achab · Answer

Hi Steven,

> Could any of those possibly be good rentals?

Most would be. But not for me. I live in California, and the houses are in Oklahoma County. Given the fact that California prices are now low, I would rather pull out my money from Oklahoma and invest it in California. An Oklahoma investor, who bought a house from me in Midwest City in Summer 2011, told me he might be interested in buying one or two (of the best two I have left - I have already sold 4) after he is done fixing one or two of the two houses he bought this year. He is keeping his buys as rentals.

Abdenour

Steven Hamilton II · Answer

Ebere,

I must distinctly disagree with you as IRS rules and regulations state that all expenses in preparing the property for rental activity(defined as listing for rent or actually renting which ever comes first) are added to basis.

He inherited the tenants when he filed for the deed of a home in which as he stated the intent was to flip. He is required to add it to the basis.

Bryan Hancock · Answer

How about if your intent was to make money?  :-)

Ebere Okoye · Answer

It depends on what you investment intent is. If your intent was to buy, hold, then sell, then yes, you can deduct the eviction costs in 2011. If your intent, was to buy, fix, and sell then those costs are added to the cost basis of the house.

Steven Hamilton II · Answer

In your scenario this will be added to your basis in the property that will then be sold.

Could any of those possibly be good rentals? Especially since you may have acquired them at a fair amount.

-Steven the Tax Guy

Abdenour Achab · Answer

Thanks to both Steves for the replies.

I acquired the property by foreclosing on a tax lien certificates. I am not normally in the business of dealing real estate. I am in the note business. But, from September 2010 to March 2011, I foreclosed on 8 properties, and, following advice from property manager/realtor, listed most of them for sale shortly after acquisition.

So I guess both of you agree that I should add it to the basis.

For my notes business, I use the Cash method of accounting (I believe).

Steven Hamilton II · Answer

Abdenour,

Why did you acquire the property?(Tax lien, purchase, inherit, etc)

If you businesses method of accounting is:
Accrual
The eviction costs go into your basis of that property if you are on an accrual basis for your business.
Cash Basis
If you are on a cash basis you will deduct in the year you paid the expense.

This is assuming you are regularly in the business of dealing real estate. If this is a once in awhile thing you do. Then you will add it to the basis.

- Steven the Tax Guy

Steve L. · Answer

I am not a CPA but it sounds like you should add it to the basis.