Re: Tax Question - Posted by JPiper
Posted by JPiper on January 21, 2001 at 18:07:26:
If the definition of aggressive means that it?s not correct, but that you might not get caught unless you?re audited, I would agree with that. As a personal opinion though (I?m not a tax expert), I don?t think this is even a particularly gray area.
This is an area that I have had lengthy conversations with my CPA several years ago. Now admittedly I?m on the conservative side of things most of the time. But in this case I was arguing for the interest write off rather than capitalizing the interest. I?m told first that one issue has to do with putting the property into ?use??.meaning renting it out let?s say. Prior to that event I?m told that interest is properly capitalized. The thing here however is that if you bought the property in January, paid the interest in January, rented the property in April, the IRS would be unlikely to know this when you reported taxes the subsequent year. On the other hand if you bought the property in September, paid interest in September and thereafter, and rented the property in January, I could see this being caught easily. As an aside, in the construction business interest is always capitalized prior to the property being placed in use.
Then there?s the substance over form argument. It might go something like this: when you bought the property and took over the note it came with interest that you knew about, and therefore paying the interest is actually tantamount to a higher purchase price.
If the property though were was later flipped and the seller is a dealer then it all comes out in the wash anyway, whether you wrote the interest off and took a higher profit, or whether you capitalized the interest and therefore took a lower profit upon sale.
Now, all this said, I don?t know if there?s been a ?case? involving these exact circumstances. But my guess is that there are numerous references to the ?use? aspect of this, and the idea of substance over form as it pertains to the purchase of a property with a defaulted note would seem quite clear to me. I would ask my CPA for some of these but this time of the year his time is short.
I believe that the proper treatment of interest in the scenario mentioned is to capitalize it. Now whether you would get caught handling it differently I can?t say. But I can think of no arguments supporting this so-called ?aggressive? treatment.