Example:
You purchased the property in 2010 for $70K, and allocated $20K to the land. That means the structure was allocated $50K, and that $50K is what is being depreciated over 27.5 years.
In 2013 you put a new roof on the house at $15K. You entered the roof as an asset on the 2013 tax return and began depreciating $15K in 2013, over the next 27.5 years. At this point, your total cost basis in the property is $85K with $20K allocated to the land which is *NOT* depreciated.
You still have $50K allocated to the structure which *is* depreciated, and another $15K to the roof which *is* depreciated.
In 2020 you sell the property for $150K. When you report the sale, you report the sale of each individual asset in the Sale of Assets/Depreciation section of the SCH E section. If you show a gain on some assets and a loss on other assets, it is my experience that the program sometimes will *NOT* correctly be able to handle this mathimatically, and will *NOT* flag any errrors... even though the SCH D and 4979 are *WRONG*.
So when you report the sale of the property itself, you allocate a portion of your sales price to the land/structure asset, and the remaining portion to the roof asset. Here's the deal.
I sold the property for $150K. Since my cost basis in the roof is $15K I want to allocate "AT LEAST" $15,001 to the sale of the roof. So I"m going to allocate $16K to the sale of the roof, so that I will show a gain on that sale.
Next, the remaining $135K gets allocated to the sale of the land/structure asset. I'll allocate "AT LEAST" $20,001 of that to the sale of the land, so that I show a gain on that sale. So I'm actually going to allocate $25K to the land so I show a $5K gain on the sale of that land.
The remaining $110K gets allocated to the sale of the structure so that I show a gain on that sale also.
Take *special* note that even after the depreciation recapture on the structure and the roof, I *still* show a gain on everything individually. When I add together my sales price of all assets, the total comes to my total sales price. No more. No less.
