gains is calculated on the basis of the original $122,500 purchase price in 1995, not the FMV of $217,00 in 2009 when we converted it to a rental. Is this correct?
That is 100% correct. That's because when you converted it to rental property, depreciation is based on the "LOWER" of what you paid for it, or it's FMV on the date of conversion. Since what you paid for it is the lower value, depreciation is based on what you paid for it. Yes, it's that simple. It's FMV on the date of conversion does not come into play for "anything". So your cost basis on the property is $122,500 for "everything".
Property improvements add to your initial cost basis. It does not matter when those improvements were done either - be it before or after you converted to rental. It still adds to the cost basis of the property.
Property improvements are added in the assets/depreciation section and get depreciated over time. For the improvements you mentioned, "new flooring) does without question, add to the cost basis of the property because it clearly meets the IRS definition of a property improvement (included below)
If you have property improvements that were done prior to 2016, then you need to include IRS Form 3115 with your 2019 tax return to report and show the depreciation you "should" have taken on those property improvements. TurboTax does not support the 3115, and that form is not simple by any stretch of the imagination. It requires professional help. So basically, in order for you to report things correctly, you just can't use Turbotax for your 2019 tax return. You need to seek the services of a tax professional. This is doubly important if your state also taxes personal income.
