Code Section 266 Election: Option for Investment of Your Vacant Land

Do you own vacant land that you want to use as an investment? The election of Code Section 266 (§266) may be something to consider.

What is §266 Election?

If you are a taxpayer who owns vacant land that is only used as an investment and is not being used for any type of business (Ex. parking lot), you can elect to capitalize on certain expenses. The expenses include: interest, property taxes, insurance, and maintenance costs.

How Does the Tax Cuts and Jobs Act (TCJA) Fit In?

The TCJA nearly doubled the standard deduction for married couples filing jointly so taxpayers may not receive tax benefits from deducting the costs associated with an investment property.

If taxpayers choose to itemize deductions rather than take the standard deduction, there is still a limit of $10,000 on state, local and property taxes.

Additionally, the TCJA removed 2% deductions, which include investment expenses.

Reasons to Choose §266 Election:

1.    The election is made on an annual basis. It may make sense for you one year and not the next.

2.    Expenses can be added to the basis of the property. In turn, there will be a smaller capital gain and lower taxes when the property is sold.

3.    Investment expenses and real estate taxes are considered alternative minimum taxes (AMT) and must be added to AMT income if you are taking them as itemized deductions.

Christopher Longwell, an attorney who specializes in real estate law for Barron Peck Bennie & Schlemmer, had the following to say about §266:

“We buy vacant land for many reasons, but two of the main ones are to build on the land immediately or in speculation that the land will appreciate over time because of its unique characteristics (location, location, location - as our real estate broker friends say). 

I think a §266 Election could solve some issues for people who are contemplating investing in vacant land on speculation. This gives those investors a way to capture wasted expenses to decrease their “gain” in later years. 

It has a direct impact on my estate planning and real estate investor clients as they are trying to diversify portfolios and are taking the standard deduction rather than itemizing, yet continuing to realize the benefit of the real estate tax deduction, which is capped at $10,000, giving them another option to reduce their taxable income.”

If you have questions or would benefit from Christopher’s legal knowledge and expertise about real estate law and estate planning law, please email him at CDL@bpbslaw.com.

If you have questions about the tax implications or other tax needs, please email us!