IRS Grants Extension for § 266 Election to Capitalize Carrying Costs

Taxpayers Seek IRS Relief for Missed § 266 Election to Capitalize Carrying Costs

The IRS granted a 60-day extension to two taxpayers who missed the deadline to elect under § 266 to capitalize carrying costs, according to a private letter ruling (PLR) issued on an unspecified date in 2026. The taxpayers, identified only as Taxpayer 1 and Taxpayer 2, sought relief under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to retroactively elect capitalization for Years 1–2 and the beginning of Year 3. Their request hinged on reliance on a tax professional and a good-faith effort to correct the error, with the PLR explicitly noting it is non-precedential and may not be cited as authority. The IRS’s response, filed on Date 2, did not disclose the specific dollar amounts at stake or the identity of the tax professional involved.

The Facts: How Taxpayers Missed the § 266 Election

Taxpayer 1, an individual, purchased Property on Date 3. For Years 1–2, Taxpayer 1 incurred carrying costs—including interest, taxes, and renovation expenses—to purchase and renovate the Property. Taxpayer 1 prepared his own tax returns for these years and deducted the carrying costs on his individual returns, unaware of the § 266 election requirement.

For Year 3, Taxpayer 1 married Taxpayer 2, and the couple filed a joint return. During Year 3, they incurred additional carrying costs to renovate the Property, which was placed into service on Date 3. The Taxpayers hired Paid Preparer 1 to prepare and file their Year 3 return, again deducting the carrying costs without making a § 266 election.

On Date 3, the Taxpayers engaged Paid Preparer 2 to review their Year 3 return. Paid Preparer 2 identified errors in the return and began preparing an amended return. During this process, Paid Preparer 2 informed the Taxpayers that a § 266 election had not been made for Years 1–3. The Taxpayers represented that they had intended to capitalize the carrying costs under § 266 all along, but the election was inadvertently omitted due to reliance on prior preparers’ advice.

IRS Grants Extension Under § 301.9100-3: The Rationale

The IRS’s decision to grant the taxpayers’ request for an extension under § 301.9100-3 hinged on two core legal standards: whether the taxpayers acted with reasonable cause and in good faith, and whether granting relief would prejudice the government’s interests. Section 301.9100-1(c) grants the Commissioner discretion to extend deadlines for regulatory elections—those required by regulation or IRS guidance—when these conditions are met. Section 301.9100-3(a) further specifies that relief is available if the taxpayer demonstrates that the failure to make the election was not due to willful neglect and that the government’s interests would not be harmed.

The IRS found that the taxpayers satisfied the “reasonable action in good faith” standard under § 301.9100-3(b)(1)(5), which deems reliance on a qualified tax professional as sufficient cause for relief. The taxpayers’ engagement of Paid Preparer 2 to review their Year 3 return triggered the discovery of the missed § 266 election for Years 1–3. Paid Preparer 2, acting as a qualified tax professional, identified the omission and initiated corrective action by preparing an amended return. The IRS emphasized that the taxpayers’ prompt response—once alerted to the error—demonstrated a lack of willful neglect and an intent to comply with the election requirement. The agency noted that the taxpayers’ reliance on prior preparers’ advice, while not dispositive on its own, was consistent with the regulatory framework when combined with their subsequent diligent efforts to correct the oversight.

The IRS also determined that granting relief would not prejudice the government’s interests under § 301.9100-3(c)(1). Section 301.9100-3(c)(1)(i) defines prejudice as a scenario where the taxpayer’s tax liability would be lower in the aggregate than if the election had been timely made, considering the time value of money. In this case, the IRS found no such harm because the taxpayers’ corrected filings for Years 1–3 would reflect the proper capitalization of carrying costs, aligning their tax treatment with the statute’s intent. Additionally, § 301.9100-3(c)(1)(ii) requires that the taxable years affected by the election not be closed by the statute of limitations before the taxpayer receives relief. Here, the years in question remained open, eliminating any risk of prejudice from untimely assessment. The IRS concluded that the taxpayers’ circumstances met all statutory and regulatory criteria, warranting the extension under § 301.9100-3.

What This PLR Means for Taxpayers and Practitioners

The IRS’s decision in this PLR underscores the importance of relying on qualified tax professionals, as the agency granted relief where taxpayers acted in good faith after missing a § 266 election deadline. The ruling highlights that professional errors—such as misclassifying carrying costs as deductible expenses—can still qualify for § 301.9100-3 relief if corrected promptly and without prejudice to the government. Taxpayers who fail to capitalize carrying costs under § 266 risk immediate deductions that may not align with their long-term tax strategy, particularly in industries where deferral is advantageous.

The IRS’s willingness to grant extensions under § 301.9100-3 reflects a pragmatic approach to administrative relief, provided taxpayers demonstrate reasonable cause and act swiftly to correct mistakes. This PLR signals that the agency may show leniency for inadvertent omissions—such as overlooking the § 266 election—if the taxpayer files for relief before the statute of limitations closes. However, practitioners should not interpret this as a blanket invitation to miss deadlines; the IRS retains discretion, and denials remain common for taxpayers who lack contemporaneous documentation or fail to show good faith.

Taxpayers must also recognize that PLRs are non-precedential under § 6110(k)(3), meaning this ruling cannot be cited as authority in other cases. Each taxpayer seeking similar relief must file their own PLR request, demonstrating that their circumstances meet the statutory and regulatory criteria. The IRS’s caveat—that no opinion is expressed on whether the taxpayer is otherwise eligible for the § 266 election—reinforces that PLRs are binding only to the requesting party and do not establish broader legal precedent.

§ 266 elections are particularly relevant in real estate development, construction, and oil and gas, where carrying costs—such as interest on construction loans, property taxes on undeveloped land, or legal fees for zoning approvals—can be substantial. Capitalizing these costs defers deductions until the property generates income, which may reduce taxable income in high-revenue years or align deductions with capital gains. For example, a developer holding vacant land may capitalize property taxes and interest, treating them as part of the property’s cost basis rather than deducting them immediately. This strategy is most advantageous when the property is appreciating in value or when the taxpayer expects to sell the asset in a future year with lower tax rates.

Practitioners advising clients in these industries should proactively review carrying costs to determine if a § 266 election is warranted, especially for projects spanning multiple tax years. Missing the election deadline forces taxpayers into the costly and uncertain process of seeking § 9100 relief, which requires a PLR request and supporting documentation. The IRS’s grant of a 60-day extension in this PLR serves as a reminder that timely corrections and good-faith efforts can mitigate the consequences of missed deadlines, but prevention through diligent planning remains the most reliable path.