Yes, you want to have it add to the cost basis. Where you enter it, however, depends on whether or not you had discontinued your rental activity (and, thus, depreciation on the home) before or after you made the improvements. If you stopped your depreciation before making the improvements, then enter the information in the Sale of Asset section. If, instead, you made the improvements before the sale, you will need to report the assets on the Rental Activities Section, Depreciation first. After your expenses (minus depreciation to be taken this year) from the improvement are calculated, the remaining basis for the improvement is added to your home's remaining basis (after subtracting depreciation taken or allowed to be taken on the home), and that will be your adjusted basis for your sale.
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