The cost basis you have to use is the basis that you used when you set up the property for depreciation as a rental property, plus additions and improvements that you capitalized, less the accumulated depreciation on the house and improvements.
- You can add the cost of the roof added in the year of sale.
- You do not add the cost of the HVAC system to the basis of the house. You allocate a portion of the proceeds from the sale to the HVAC, as well as all other improvements you capitalized and calculate and report the gain or loss on each of these assets.
- You cannot add the cost of your DIY bathroom, or anything else that you previously deducted (expensed) on your taxes.
- You cannot increase the cost basis for any improvements made prior to 2023, unless you file Form 3115 Application for Change in Accounting Method.
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