The Internal Revenue Service has issued a legal memorandum concluding that certain expenses a bank incurs to maintain foreclosed property before its disposition are deductable for tax purposes. The memorandum resolves conflicts over whether such costs should be currently deductable or capitalized. The memorandum acknowledges that a bank does not acquire other real estate owned (OREO) property for the purpose of reselling it at a profit. Instead, the product is the loan.
When a secured loan goes bad, the bank may acquire the property securing the loan, and it must resell that property within a specified timeframe. While the bank holds the OREO property, it may incur certain maintenance expenses. Under the memorandum, the IRS has conceded that these expenses should be deductible. The IRS Chief Counsel memorandum may be reviewed in its entirety at: https://www.irs.gov/pub/foia/AM2013-001.pdf