Investors & landlords

We replaced the flooring just prior to the sale of this property. I understand that expense can be added to the basis. Can you break down how I list that improvement on the asset/depreciation screen?

There's two ways to do it, and I recommend the first way because it's less likely to raise flags. I don't know if the 2nd way will raise flags or not. But it would be no surprise if it did.

1. Enter the asset in the assets/depreciation section (Called Sale of Assets/Depreciation if you've already indicated prior that you sold the property) classify it as residential rental real estate and give it an in service date of the closing date of the sale. At most, 15 days of depreciation will be taken and if so, it will be so negligible that it just won't matter.

2. Enter the asset and classify it as "residential Rental Real Estate" with an in service date of your closing date on the sale. Then enter the same value (your cost) in both the COST and COST OF LAND box. While technically that's wrong (probably wrong legally too) it will ensure that not a single penny of depreciation is taken on the asset. Besides, since the asset was never placed "in service" per-se, there should not be any depreciation taken anyway.

Is this correct?  (see below)

Asset sales price=sales price less land assessed value less  value of other prior depreciated assets + $1

Asset sales expenses=closing costs

Land Sales Price=land assessed value

Land Sales Expense=   I have left this blank as all the closing expenses are listed above in Asset Sales Exp

I can't tell if we're on the same page or not. So here's my take on it.

Overall sales price $200,000 with $5000 in sales expenses.

Original purchase price was $100,000 and when I set this up years ago, I allocated $30,000 to the land with the remaining $70,000 allocated to the structure.

Later, I paid $5000 for a new HVAC, and $10,000 for a new roof.

That makes my total cost basis in the property $115,000 but it does "NOT" change my allocations. I still have $30,000 of that cost basis allocated to the land, which is not depreciated, and  the remaining $85,000 allocated to the structure and other depreciated assets.

Now, since  30% of my cost basis is allocated to the land, I'm going to allocate 30% of my sales price to the land, and 70% to the structure and other assets.

LAND sales price - $60,000 (this amount is more than your "cost of land" amount since you sold at a gain.)

I'm also going to allocate 30% of my sales expenses to the land, with the remaining 70% to the structure.

LAND Sales expenses - $1,500

With the above numbers, I show a $28,500 gain on the land. So far, so good.

What I have left is $155,000 to allocate between the structure, roof and HVAC. So now I'm going to pick numbers "out of thin air" to assign as the sales price to the structure and remaining assets, ensuring that I show "at least" a $1 or more gain on each asset, after subtracting the remaining $3,500 in sales expenses. Also, to make it easier, I'm just going to assign those remaining sales expenses to the structure only, and nothing to the remaining assets.

Structure sales price $120,000

Structure sales expenses $3,500

Doing the math, I show a $46,500 gain on the structure after subtracting the remaining sales expenses. I've accounted for $180,000 of my sales price thus far.

ROOF sales price, $12500.

ROOF sales expenses $0 (Already used up my sales expenses between land and structure)

Doing the math, I show a $2,500 gain on the roof. All good, and I still have $7,500 of sales price to "use up". So lets allocate that to the HVAC

HVAC sales price $7,500

HVAC sales excpenses $0 (already used up sales expenses on land and structure)

Doing the math, we show a $2,500 gain on the HVAC. We're good and all is done. Now to check it, lets add up the sales price of everything.

LAND - $60,000

STRUCTURE - $120,000

ROOF - $12,500

HVAC - $7,500

TOTAL -

TOTAL SALES PRICE adds up to $200,000, which is what you sold the property for.  I show a gain on all assets. Therefore all depreciation on each asset is recaptured correctly and taxed at the "ordinary income" tax rate, and not the capital gains tax rate.