@earth777
(1) If you were to consider/ recognize the first set of improvements ( not the repairs ) by themselves ( property rented out and improvements without consideration of pending sale ), then you would have depreciated these improvements and thereby increase your accumulated depreciation, resulting in increased income on Schedule-E, reduced basis and thus at the time of sale a higher gain but more of the gain being treated as ordinary in com e ( not capital gain tax rate ). Therefore , and since this was all within a reasonable time period ( less than a year ), it probably more tax advantageous to include all the improvements as part of sales preparation expenses.
(2) Note that when you sell this rental/income property , you are selling as a business property --- thus you use form 4797 and schedule D. So I do not see any advantage in terminating a rental property, recharacterizing as second home and then sell it ---- at that point it is not business property. The current method is the one that allows use of business property benefits. Once a property has been used for business / income, it is best to keep that characteristics.
(3) Because this was your main home then with a look back period of five years from the date of sale conclusion/ consummation ( closing ), you would have to meet the 2 years of ownership and 730 days of main residence use to be eligible to exclude any gain.
(4) Note that from the gain, an amount equal to accumulated depreciation ( whether taken or not) will be taxed as ordinary income, the remainder can be give Capital gain tax treatment and/or excluded up to 250K per filer meeting the "main residence use " clause. That is another reason why you want to bin as little as you can in the depreciation category , if allowed by law.
Does this make sense ?
