Deduct prior years major improvements when sell rental house ?

[akm]

Is it possible to somehow deduct, for 2019 return, the cost of major remodel improvements done in 2010, when the single family dwelling rental property was purchased; and was sold in 2019 ?

And if so, how to do it with TT 'Home & Biz 2019' ?

Thank you.

[GiseleD]

If this house was a rental property when the improvements were made, then no. The cost of major improvements would need to be reported in the year in which they occurred and depreciated over time. If you didn't depreciate these improvements and they didn't qualify for immediate expensing, you have some work to do based on the missed depreciation (I'm assuming that the house was a rental property from 2010-2019). You can only amend a return back one year to account for missed depreciation. Otherwise, you will need to use Form 3115 to obtain the IRS's consent to claim the missed depreciation. This can be a very involved process, and you may need to contact a local tax pro to help you with the missed depreciation. 

Not filing Form 3115 and just eschewing the missed depreciation is not a good option, either. Depreciation allowed or allowable will be recaptured; that means that even if you didn't take the depreciation deductions, you may still be taxed on them in the form of depreciation recapture when you report the sale. 

If this house was NOT a rental property when the improvements were made and you later converted it to rental use, then you ideally would have already added the cost of the improvements to the cost basis of the home. If you didn't, please see above about Form 3115. 

[akm]

Thank you for the info !

Followup questions:

1 - Could we just add the 2010 improvements cost to the 2019 'Business Income and Expenses'/'Sales of Business or Rental Property'/'Cost of Property (or Tax Basis) Plus Expenses of Sale' number ?  Btw, the house was not a rental when the 2010 improvements were made, but unfortunately we didnt add to the cost basis.

2 - Would we have the same problem for a future sale of our primary residence home with major improvements done in 2008 & 2012 ?

3 - Couldnt figure out how to delete (for start over) the entry at 'Sale of Business Property' 2019 entry at the 'Business Income and Expenses' list, so went to 'Schedule D' and deleted. That seemed to work, but is that the only way to do 'delete' that entry after all has been entered and saved.

Thanks again !

[ColeenD3]

When the property was orignally placed in service, did you properly choose the lower of FMV or basis to depreciate it? It may not be an issue of the FMV was chosen.

[akm]

Thank you for the followup !

We have been using TT for years, but only have hard-copy records available for those many years (including the subject rental years).

But, not sure what 'VML' is referring to, and where we should look in the hard-copy records for such info.

Please advise.
Thanks again.

[LeonardS]

"FMV" is short for  Fair Market Value.  Fair market value is  the current value of an asset, or what something would sell for on the open market. Fair market value can have a major impact on your assets when it comes to taxes, and real estate transactions.

[Carl]

1 - Could we just add the 2010 improvements cost to the 2019 'Business Income and Expenses'/'Sales of Business or Rental Property'/'Cost of Property (or Tax Basis) Plus Expenses of Sale' number ? Btw, the house was not a rental when the 2010 improvements were made, but unfortunately we didnt add to the cost basis.

No, you can not. If the improvements were done in 2016 or after, you will have to amend the 2016 tax return to add the property improvment in the Assets/Depreciation seciton and start depreciating it. Then you'll need to amend every single tax return for each year (in year order) after that to show the depreciation  you took on that aset each tax year after it was placed in service. This is a *LOT* of manual work on  your part.

If the improvements were done prior to 2017, then amending is not an option for you. IRS Form 3115 will have to included with your 2019 tax return, in order to correctly account for the depreciation you did not take on those property improvement assets.

The 3115 is *NOT* simple by any stretch of the imagination and requires professional help. That would mean there's no need for you to even be using TurboTax for your 2019 tax return.

2 - Would we have the same problem for a future sale of our primary residence home with major improvements done in 2008 & 2012 ?

Yes. Definitely. However, that can be taken care of on the same 3115 that I assume you will be filing with the 2019 return anyway.

Just make sure you get a printout from the paid tax preparer you hire to handle this, so you will have that printout for TurboTax 2020 next year. If you get the professional help required for your 2019 tax return, then you will definitely need the printout to enter everything in your 2020 return next year. You flat out will not be able to import from 2019 when you start your 2020 tax return next year, as the imported information will be wrong since it won't be the same data as filed by your hired tax professional this year.

3 - Couldnt figure out how to delete (for start over) the entry at 'Sale of Business Property' 2019 entry at the 'Business Income and Expenses' list, so went to 'Schedule D' and deleted. That seemed to work, but is that the only way to do 'delete' that entry after all has been entered and saved.

The sale of rental property is not reported in the "sale of business property" section unless unusual and uncommon circumstances apply. In your case, you have an uncommon circumstance of not having taken depreciation as required by law. So I would suggest you not worry about deleting anything in the TurboTax program for 2019 and just abandon it for this year. You really *need* professional help and you need it yesterday if not sooner. The longer you wait to fix this, the more it will cost you in the form of back taxes, interest and penalties. It's gonna make the cost of professional help seem like a pittance in comparison.

So "please" get professional help for dealing with this on your 2019 tax return yesterday, if not sooner.

[dyeargin1]

We added 2 garages and had driveway and turnaround concreted while we lived in this house.  When we moved, we started renting the house.  Now we have sold it and were wondering if we could somehow claim the garages and turnaround in with the cost of the house.

[LoganathanB]

You can add the cost of 2 garages and had driveway and turnaround concreted to the basis/cost when calculating the capital gains/loss

[dyeargin1]

Thank you so much.

[LeonardS]

When selling your rental property the IRS requires that you use the LOWER of the original purchase price, or the fair market value when it was converted to a rental.

However, there are other factors that must be considered in calculating the gain/loss on a rental that was your home before it became a rental property.

If a residence converted to a rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken. If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)).

This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property.

[Vick]

Hi Gisele, if the house was not a rental property but rather one's primary home, can capital improvements from prior years (unreported on those years' tax returns) be included in the current year's returns?

We will close escrow on the sale of our 21 acre property in a few weeks, but we haven't included roughly $650k in capital improvements from prior years. Because the depreciation was never taken, and will be recaptured now that the property is selling, is Form 3115 still relevant for us, or can we just list the capital improvements and not bother with depreciation?  

Thank you! 

[xmasbaby0]

@Vick  You have added on to a thread that has posts from multiple users, some of whom have asked questions about rental property.   It seems like you might be confusing some issues that have to do with selling rental property with selling your primary residence.   Has your property ever been used for rental?  Why are you mentioning depreciation?     And why are you mentioning entering improvements to the home on prior year tax returns?  Improvements to your own residence are not entered on a tax return, but you may be able to use them when you sell the house.  

Please start a new thread and explain your situation more clearly.  Meanwhile we may get some help from a couple of other users.

@Carl     @Critter-3 

[Vick]

Thank you, and my apologies for any confusion. I mentioned depreciation because yes, the property has been used as a rental for the past three years. Prior to that, during the capital improvements phase that lasted four years, it was our primary residence. 

If as you say improvements to one's own residence is not entered on a tax return, then perhaps this is a non-issue. We were just concerned that our true cost basis would not be accurately reflected in this year's tax return filing if we failed to add those capital improvements. We are looking at a capital gain of $2m at the moment but were told our capital improvements of $650k should be deducted from that amount because it should increase our cost basis. 

I hope that clears things up, and I can start a new thread after if you still think that is appropriate. 

Thank you again. 

[xmasbaby0]

@Vick  I think it would be a better idea to start your own new thread.  Add ons to old threads can sometimes be missed by forum users and may go unanswered.   Someone better equipped to reply to your rental issues will see it if you start a new one.

Click on the blue box that says Ask a Question to start a thread.

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/02/208