Hello -
I spent a few hours researching this but not able to find clear guidance.
- Property was my home since 2008. Moved out in June 2022, vacant for 9 months or so then converted to rental in 2023 and rented in Apr 2023
- In Feb 2024, Improvement A ~15K was completed while tenant was living in house (upgraded carpet in master to hardwood, added external wall insulation, fixed a roof leak, replace water heater)
- Tenant moved out in Sep 2024 as per our request to prepare for sale. property was removed from the rental market
- Oct 2024 - Improvement B ~40K was completed to prep for sale then listed
- Dec 2024 - Sold with a gain exceeding the exclusion allowance for main home
Question as to how to account for the above 2 improvements (below are some thoughts and would appreciate your input):
Improvement A - Since the hardwood flooring, water heater and wall insulation are all put into service same year as sale, i understand the IRS does not want them depreciated. the improvements were done in Feb when the property was still a rental. should i add them as additional assets (Option 1) in Sched E or expense them (Option 2)... does Option 1 case TT to depreciate on mid-month basis? if so, this would be an issue. [side question - when i dispose of them for a gain, will TT compute a short-term gain given < 12 months or will it default to the to the parent asset, the land or house and therefore compute a long-term gain]. Option 2 seems a bit odd to explain expensing flooring etc. which will reduce income vs capital gains that IRS will not like... i suppose for the water heater, since the cost < 2.5K, i can elect DMSH and expense it.
Improvement B - Since it was done after tenant left, i plan to convert the property to person use end of Sep thus removing from Sched E and adding the 40K to the cost basis, reducing my gain
thank you!
