Do I need to set up the roof as a new assest, even though it was so close to the sale of the home, or can I use it towards my cost basis?
You do both. Enter the new roof as an asset, show it's in service date as of the date the work was completed, and the program will figure the depreciation for the month or two between the time the work was completed, and the closing date on your sale. Take note that all assets add to the cost basis. That's why you enter it as an asset. (Since that's what it actually is and it was "in fact" used in the business for the purpose of producing income.)
Can I use the full cost of the roof or must I deduct any insurance reimbursement?
Either or. But not both. Understand that all income received for rental property for any reason from any person or entity, is rental income. Period.
Enter the full cost of the roof in the Assets/Depreciation section. Then the insurance payout is included in the total rental income received for the tax year. This is the simplest and easiest way to deal with this. There are other ways. But since you sold the property so shortly after replacing the roof, it's really not worth getting into. Besides, the other ways are math and time intensive.
