Tax question on state taxes paid for a business?

Question

I own an S-corp that purchased a significant amount of county property tax liens. The liens accrue interest at 12% per year on the face amount of the tax plus any statutory costs, which include subsequent taxes paid. In order to preserve your claim you are required to pay all subsequent taxes on the property. They have until April 2008 to redeem their property and pay all costs plus interest. The initial payment is of course an extension of capital. However, are subsequent payments an expense or are they capitalized? For example, expenses for title work and to pay other subsequent taxes are they capitalized expenses and an increase in basis or an expense of holding the lien. About 1% of all liens default so recovery of costs with interest are highly likely. The lien expires without claim if not acted upon in a timely fashion as described in the governing statute by the owner. The property converts by law if acted upon in a timely fashion to the lienholder.

Answer 1

It would be capitalized.

You basically list when you bought it and what price, then additional costs to make up your total cost of goods (like certificate fees in some counties, proxy bidding fees, etc). When the lien is redeemed, you would then state the date it was redeemed and how much. The difference is what you're taxed on. This is similar to how stocks are calculated.

I'm not an expert on this, but I would refer to the book below for more information.

Answer 2

This is way complicated, and is best suited to a tax professional who understands your exact situation, but basically (I think) you're asking whether incidental costs associated with maintaining these liens should be expensed.

If that's the case, yes, as any increase in basis is due to costs associated with acquisition and improvement of the asset, not on maintenance. If, for example, you spent $2 adding another room on a house, increasing its value to $4, that increases your basis. If, on the other hand, you spend $2 mowing the lawn, that is an expense, as it is neither a rare event, nor does it represent a permanent improvement.

Again, though, I'd direct you to a local tax accountant who can sort out all of the issues that you've raised.