Yes, your capital improvements should have been entered as separate assets for the tax year you made the improvements. Those assets, as part of the rental property should also have been depreciated. You do NOT just add them to your cost basis. When you calculate the gain (assuming you have a gain) on the sale, you have to calculate depreciation recapture for all the depreciation taken, or eligible to be taken. That means you have to include the depreciation you could have/should have taken on the capital improvements, even though you didn't deduct it as an expense in previous years.
There is a work around for this. You can file Form 3115, Application for Change in Accounting Method and take all the missed the depreciation on your current year return. While you can file Form 3115 with TurboTax, it's not a simple form. For more information see the following IRS website:
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