Talk to me like I am 5. How in the heck do I account for improvements for rental property right before selling it?

[jeanne17]

I keep seeing folks say, just add them to your cost basis - but TT explicitly states one should NEVER adjust the original cost basis (it's already populated as it transfers from previous years). 

So, exactly what does it mean when I read other posts that say to do that?

All TT gives me is a place allocate sales price, sales expenses (which wouldn't include, say, a new roof), land sales price and land sales expenses.

So how would I account for the cost of the new roof?

I thought about adding it as a new asset, but that makes no sense since it's being sold just weeks later.

[tagteam]

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@jeanne17 wrote:

I thought about adding it as a new asset, but that makes no sense since it's being sold just weeks later.

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That is understood, completely, but it's the method you need to use when working with the TurboTax program.

[jeanne17]

Ok, so let's say I add the roof as a new asset - and then immediately sell it. (I guess?)

Roof was $7259. Placed in service 7/7/2023
Sold the house 9/1/2023.

TT then shows $44 for depreciation. Fine. Don't care.

But, in the asset disposition area, what is the sales price of the roof? $7259?
What is the sales expense for selling the roof? Also $7259?
(Obviously land is 0 in both sales price and sales expense).

[tagteam]

Allocate a portion of the total sales price to the roof.

[jeanne17]

Ok, so....let's say we sold the house for 179,000. (Land portion is 23,300).

You're saying I just take part of that $179 and say, "hey this was for the roof alone. Since we paid $7259 for the roof, I guess we sell it for $7259." (But 0 for sales expenses for it, 0 for land for roof asset since it's not land).

Then, when we show the sell of the house asset itself, instead of showing $155700 for asset and $23,300 for land (which equals $179, and what I originally had entered), we would actually show $148441 for the sales price ($155700-$7259). And the IRS will figure out somehow that we've accounted for everything and not think we're misreporting (I know they received a 1099-S that shows $179, so I just assumed my actual *house* asset has to show that total when sold, but you're saying it doesn't). Is this correct?

[tagteam]

It really makes no difference what the improvements were sold for as long as they are (a) reported as sold or taken off the "books" and (b) the total sales price corresponds with the gross proceeds on the 1099-S.

[jeanne17]

It actually made pretty big difference - almost $3k difference.

If I listed each improvement we did before selling as an asset (say, roof and then also appliances, etc.) and I put the sales price of each of those (improvement) assets as 0? Then the cost of those is a loss. But then I reported the entire sales prices of the house (excluding the land) and it's taxed at a lower rate due to capital gains I guess?

In other words, I put $7259 as cost of roof. I then noted I purchased it and I sold it. For sales price and sales expense of the roof I put $0 (technically, I didn't sell the roof off separately from the house, right?)

If I put $7259 as cost of roof, and then for sales price of roof if I put $7259 (and then reduces the sales price of the house itself by that much), it definitely increases my tax burden.

Which of course makes me nervous if I do it this way, ha.

[CuriousDom]

Why was the roof replaced? Was the cost incurred to simply bring the roof back to the same condition using the same materials? 

Without knowing all the facts, it is more likely than not that the cost of the new roof will be classified as a repair expense if the answer is yes. If the cost incurred is not for "betterments made to increase the value" of the property, then it should not be capitalized.

Here is an article that you can reference if you want to dive deeper into this topic: Guide to expensing roofing costs (thetaxadviser.com)