Do we just add a separate asset sheet and depreciate the improvement separately?
Yes. In TurboTax you will add the new asset(s) in the Assets/Depreciation section.
If I add a new asset (the improvements) for depreciation can I choose 40 yr again (or must I use the 27.5 default)?
For rental property and their assets that are physically located in the US, they get depreciated over 27.5 years. If the rental property is located outside of the U.S., they get depreciated over 30 years.
Or can I add to the original basis and continue the depreciation on the original sheet (for the remaining 32 years)?
Under no circumstances and with no exceptions will you ever change the cost basis of an already existing asset. It will completely screw up your depreciation and depreciation history. There are no exceptions. (Unless you made a mistake when initially setting up the asset. But there's a procedure for correcting the mistake with IRS Form 3115 that must be followed. You still do not just arbitrarily change the existing cost basis.)
