Deductions & credits

It depends.  The IRS language for the depreciation you did not claim is allowed or allowable which means use it or lose it. The capital improvements can be added to the cost basis but the depreciation on these improvements must also be accounted for to reduce the cost basis. This means the gain would increase by the depreciation that would have been used had you entered this improvement when it became a rental property. 

Add the improvements as an asset with the original date as if you had put it in service like the house. Then prorate the selling price and expenses for each asset for the sale.  See the example below.

To take the deduction for the depreciation that you never utilized over the 10 years, on your 2021 tax return, you can use the procedure below.

• Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2021 tax return.

1. Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
   • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
2. You must use the TurboTax CD/Download version to complete this form. TurboTax does not help you with this form. And your return must be mailed because this form is not supported through e-file.
   1. This must be completed and filed with the return on time. 
   2. How do I switch from TurboTax Online to TurboTax CD/Download?

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

I hope this example provides clarification to enter your sale.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

@bigsteve1037