A property was purchased in 2018 with a building (non-land) cost of (approximately) $40 thousand. It was in poor condition. A contractor was brought in to renovate the property, and he gutted it; removing the roof, interior flooring, kitchen cabinets, and countertop, all bathroom fixtures, electrical wiring and plumbing. All was replaced with new at a cost of $50 thousand. After the renovation the property was placed on the rental market with an agent, in 2018.
(1) Should the value of the removed items be expensed on Form 8797 Sale of Business Property Part II ("Ordinary Gains and Losses"? Reviewing the IRS's Publication 527 (2018), Residential Rental Property and other examples online this is not addressed and the tacit assumption is all the original purchase price goes into basis to be depreciated. But if a rental asset that was not fully depreciated was replaced the undepreciated basis would be expensed, so I think this is the right way to do it.
(2) Then comes the question is what would be the "value" of the removed items? Are there any allocation formulas? Every Landlord's Tax Deduction Guide references two sources of "cost segregation study software" namely KGKG and TitanEcho that "in theory" could help but cost $400 each. The book notes that the software uses data provided by the user and construction cost data and proprietary formulas to do the cost segregation. If anyone has a more open-source allocation reference it would be appreciated. Would an allocation of 50% of the original building cost be "reasonable"?
