Tax Alert

IRS Reverses Course on Capitalization of Costs of Holding REO
(March 7, 2013)

In recent years, the IRS has asserted that costs incurred by banks related to real estate owned (REO) acquired through foreclosure proceedings such as real estate taxes, insurance, and maintenance should be capitalized rather than deducted when incurred. (A Crowe article provides detail on the IRS’ prior position.)

In a recently released generic legal advice, the IRS reversed its position and concluded that these costs are deductible when incurred when a loan-originating bank acquires REO through foreclosure and promptly attempts to sell the REO without improvement. The IRS indicated the costs were deductible because the acquisition and sale of REO is an extension of the bank’s lending activities and not the result of traditional resale activities.

The generic legal advice does not address the impact on deductibility if a bank makes improvements to the property prior to offering it for sale or does not promptly put the property on the market.

It is hoped that in the near future the IRS will provide additional guidance on cost capitalization for all REO property as well as guidance for taxpayers who have been capitalizing these costs.


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