do I manually change the original purchase cost, or add more asset
Under no circumstances and with no exceptions do you ever change the cost of an item in the assets/depreciation list. If you do, you will completely skew the depreciation and the depreciation history on that asset.
Absolutely nothing concerning your property improvements will be placed or reported anywhere on your 2020 tax return. There are two reasons why.
1) The improvement was never placed "in service" as a rental asset in 2020
2) You did not sell the asset in 2020.
I Spent months of 2020 fixing, updating, upgrading the house for sale
So you've made it quite clear that after the last tenant moved out, you had no intention of renting the property out again. Your intention was to sell the property. Therefore, on your 2020 tax return you need to indicate that you converted this property to personal use, with a conversion date of one day after the last tenant moved out.
As you start working through that rental property about three screens in to the Property Profile section, you'll have a checkbox you need to select to indicate that you converted the property to personal use. After you check that box, continue working through the property profile section all the way to the end. Typically, any changes/selections you make are not saved until "after" you get to a screen with a DONE button on it, and actually click that DONE button.
Then work through your rental income and rental expenses section as normal.
Then start working through the assets/depreciation section. You must do the below for each individual asset listed, one at a time.
- Elect to EDIT the asset. As you work it through, indicate that you "stopped using this asset in 2020".
- On the "Special Handling Required?" screen you *must* select YES. If you select NO, then you will be "forced" to enter sales information. That would be wrong, since you did not sell the property in 2020.
You must do the above for each individual asset listed in the Assets/Depreciation section.
When you have completed and filed your 2020 tax return, you need to print out the two IRS Form 4562's for that property, along with the IRS Form 8582 for that property. Both of the 4562's print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation".
You will "NEED" the information on those documents next year, when you report your sale on your 2021 tax return. You will be reporting this sale in the "Sale of Business Property" section on your 2021 tax return, which you will not deal with until next year. When you report this sale in the "Sale of Business Property" section on your 2021 tax return next year, that is when you will add the cost of your property improvements to your cost basis, and not before.
