Q:

Subject: Condo

Kerry,

I purchased a condo in 2005 at a sheriff's sale as an investment.  I sold it early in 2006 for a profit.  I did not live in the condo at all (I already own a primary residence).  My understanding is the gain would be treated as a short term capital gain subject to the 25% tax rate.  I would like to verify something my CPA told me.  As part of the purchase, I paid off the former owner's delinquent real estate taxes (about $6,000).  According to my CPA, this amount cannot be deducted as the IRS only lets you deduct real estate taxes for the time the property is owned.  Is this correct, or is this something that is equivalent to an "investment expense" I could put on my Schedule A, subject to the 2% of AGE floor?  Or could I add that amount to my basis to offset my gain on my 2006 taxes?

I did not do many upgrades or "capital improvements" to the property - mostly just painted, cleaned the carpets, etc.  My understanding is this is also not deductible on my 2005 return and also does not reduce my gain on my 2006 return (i.e. it does not change my basis).  Is that correct?  Just looking for a check on my CPA.  Thank you for your help and for the great site.

A:

You seem to be misunderstanding several key points here.

First, there is no special 25% Federal rate for short term capital gains.  Those are taxed the same as ordinary income, which has nominal rates up to 35%, plus the implicit rates of the phase-outs due to high AGI.

When you buy a property for back property taxes that had accrued under the prior ownership, it has always been the proper thing to add the taxes to your cost basis of the property, which will reduce your gain when it is sold. 

The costs you put into the property, including paint and cleaning, should also be added to the property's cost basis.

These are all very basic concepts that any competent tax pro should understand.  If your CPA doesn't, you may need to find one who is  more experienced with this kind of thing if you will be doing more of it in the future.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 08:35:00 PM Send this post: