Cost basis for renovated rental for sale

[laurazahn]

I bought a rental on foreclosure 12 years ago for 32k. I did about 20k worth of work on it so it was livable. 

I did not claim that work on my taxes for depreciation. Depreciation is in the 32k for recapture. It was a roof and addition remodel. 

I sold the property for 70k with 6k sale commissions. 

How do I handle this? Is the basis 52k? Is the sales cost 26k?

[DianeW777]

The depreciation expense under tax law is 'allowed or allowable'. Simply put, if you had depreciable property, regardless of if you‌ used the depreciation, it must be recaptured at the time of disposition (sale).

First add the capital improvements into your tax return with the correct date placed in service. This will provide the correct amount of depreciation for 

Next, for the prior depreciation you have not used.  At the point of sale, you will recapture any depreciation that was allowed or allowable. 

• You can use the following form to correct the depreciation for your rental property. Take any amount not previously expensed on prior returns, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2024 tax return.

• Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
  • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
• You must use the TurboTax Desktop ‌ to complete this form. TurboTax doesn't help you with this form. And your return must be mailed because this form is not supported through e-file.

This must be completed and filed with the return on time.

You can change to TurboTax Desktop if you choose.

• How to switch from TurboTax Online to TurboTax Desktop?

[laurazahn]

Don't follow sorry. So increase the cost basis and then somehow do something with depreciation that was never taken and then add it back in? 

[ThomasM125]

You need to file Form 3115 Application for change in accounting method in order to deduct the depreciation from previous years that you failed to claim. When you are done with that form, you can deduct the missed deprecation on your current year tax return.

You need to determine what the cost of the property is in order to have an amount to calculate the allowable depreciation. You do this my adding to the original cost of the property the cost of improvements you made to it. When you sell the property, you deduct the cost of it less the depreciation allowable to determine the taxable gain. The gain is taxable as capital gain income except for the amount of depreciation, which is taxable as ordinary income but only up to a maximum tax rate of 25% federally.

Here is an article on how to report your back depreciation .