What is the tax treatment of real estate expenses after a property is acquired?
After a property is purchased, there is generally a time period that a property is held before it is developed. Common expenses that are incurred are property taxes and interest. Other expenses incurred can be classified as an operating expense, added to inventory cost or capitalized for tax purposes.
Property taxes and interest on vacant land are generally capitalized or added to the cost of inventory for real estate. These expenses on vacant land can only be deducted in the same tax year if there is property income received and the corporation is not in the business of development.
Representation costs and site investigation costs discussed in the previous FAQ would be deductible in the same tax year that the expenditures were paid.
There are various other expenses that a corporation may incur before the property is developed or earns income. These expenses could be considered deductible expenses or improvements that are capitalized. If there are repairs incurred to maintain the property such as normal wear and tear, then these expenses would be deductible. If there are significant repairs that are incurred as property was purchased in poor condition, then these repairs may be considered capital in nature and added to the cost of property.
If there is equipment purchased for the property, then it may be classified as an expense or capital cost. For example, if a new fridge was purchased for a building to replace an old fridge, then it should be deductible as a repairs and maintenance expense. If additional appliances were purchased that were non-existent before, then these would be capitalize.
If you would like more information on deductibility of expenses in real estate, please contact us.