Adusted cost basis for sold rental property not transferring to state return - how to fix?

[user17729139211]

We sold rental property in 2025. We had adjustments to the cost basis to add in (improvements to the property)  - I figured out how to do this manually on the Asset Entry Worksheet line 29 (Note to Turbotax: the instructions on the desktop premiere version for doing this with the interview refer to screens and questions that DO NOT EXIST in the software - this should be fixed. Very frustrating to pay extra for "premiere" software that does not provide any additional help/functionality).

In any case: On the federal return, this manual entry seems to have worked: the cost basis was adjusted and the net profit/income was reduced accordingly.

I also put the same amount (that is, the adjusted cost basis) on line 63-p of the same Asset Entry Worksheet, where the "State Depreciation" is calculated, assuming this would be necessary so that the same adjusted basis would show up on the state form.

But: it doesn't. When I got to working on the state form and got to the interview section "Schedule of Gains/Losses" for this property, it autofills the original (unadjusted) cost basis - and the net profit/income is higher on the state return than on the federal return. State is PA, if that matters.

Questions:

1) should this be corrected, or does the state not allow for an adjusted cost basis?

2) if it should be corrected - what's the best way to do that?  There is a box to check that says "This sale requires an adjustment to the basis of the asset"  but when I click on "Learn More" it tells me that this is for a "cost basis adjustment due to Pennsylvania non-conformity" - which is not the reason for our cost basis adjustment. Should this be manually corrected on the Asset Entry Worksheet, on line 63c? Or somewhere else?

Thanks in advance for the help.

[DianeW777]

It depends. If you remove any entry that you entered yourself in Forms and follow the steps below, it should flow appropriately to the state return. Also, if there were capital improvements made in late 2024 and/or 2025 that would not be part of your assets already in place on your rental, this cost would be part of your selling expenses. The reason is that assets placed in service and removed in the same tax year are not allowed to be depreciated.

• Example: In 2024 you began capital improvements that were not complete until 2025, therefore not ever entered as an asset. Add this to your selling expenses because due to the depreciation you cannot add this to the cost basis of the building.

Use the instructions below to enter your rental sale. When you get to the Sales Information page, follow the instructions above for selling expense if applicable.

For your rental property sale in TurboTax Desktop see below:

1. Search >  Type rentals > Click on the Jump to... link > Continue to the Rental and Royalty Summary screen
2. Select Edit next to your sold rental property > Scroll to Assets/Depreciation > Update
3. Once you reach the asset section of your rental property you will select each asset and then indicate the following as the screens come
   1. On the screen 'Tell Us More About This Asset' 
      1. Select I purchased this asset and The item was sold, retired, etc...
      2. Enter the date of sale
      3. Continue to Select 'No' for Special Handling.
      4. No - it was not the sale of your main home
      5. Enter your Sales Price, Sales Expenses, Land Sales Price, Land sales expenses.

See below the best way to arrive at your selling prices for any and all assets. 

Here is an example of how you prorate the selling price to each of the assets including the land.  

For any asset, such as appliances, that really have no value because they are past the recovery period of five years you can use a zero.

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset. If you want you can check the allocation of building and land in your county real estate tax office, on file now.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

Passive Activity Loss Entry if applicable:

Assuming your passive losses were carried over each year, this will be a separate and identifiable entry which will carry to the Schedule E.  The full remainder of passive loss carryover is used in the year of sale as an expense. This is combined with your overall rental gain or loss to your Form 1040. 

• When you are on the screen 'Do any of these situations apply to this property?' (Property Profile section), be sure to check the box under Carryovers. 

You might also review information here for more details 

[user17729139211]

Thank you for your detailed response. I have a couple of follow up questions.

1) In figuring the percentage of sales expenses to allocate to each asset (house, land, improvements) - do I use the original cost of those assets, or the sales price? For example, if I purchased the property for $120000, and at the time the land value was $20,000, then the percentage would be 83% house/ 17% land. But if I sell the property for $220000, and the land value is stable at $20,000, then the percentage would be 91% house/ 9% land. Which value am I supposed to use here? 

2) With regard to adding the recent improvements to the selling expenses - does that total sum get apportioned among ALL of the assets listed under the property? For example, if we had $20k direct selling expenses (on the settlement charge sheet for the sale) plus another $50k of improvements in the final months of ownership, totalling $70k, and we also had assets/improvements from 2023 totalling $10k, would we apply a percentage of the total sales expenses to that $10k asset?

3)Follow up question: how does one determine if an asset is "past its recovery period" enough to assume it's zero percent of the sales price/ sales expense?

4) regarding passive activity losses: we had passive losses in previous years but they did not carryover in the program, even though when I go through past returns I can see "unallowed" losses listed on previous year passive loss form 8582. Should I just add them up and put them in the form field when it comes up blank? 

Assuming you are a human and not AI, I thank you again for your time, expertise, and help with this.

[AmyC]

Yes, we are human!

1. Allocate according to the FMV at the time of sale since that is when the selling expenses were incurred.

2.Selling expenses $20k allocated among the items as @DianeW777 shows above goes to the house, land, and improvements. Improvements of $50k during 2025 are not expenses of the sale, they are capitalized costs. This means it either becomes another asset or you can add it to the basis of the house. The 2023 amount of $10k  is already listed as an asset so you simply mark it sold and determine the amount. Diane is very thorough and her way is correct to divide up everything in the asset category to spread out the sales price. 

For example: start with asset,  basis = original cost minus depreciation

• House $100,000
• Land  $20,000
• Dishwasher $100  for small items like this, I find it is sometimes easier to sell it for zero and not include it in these calculations.
• Bathroom renovated $10,000
• New roof  $15,000

Add up total cost basis of the assets listed. Total for this example is  $145,100. 

• Next,  divide each asset by the total to get the percentage for that item.
• House $100,000 / 145100  =68.9% and so on.
• Land  $20,000 / 146,000
• Dishwasher $100 / 146,000  - the percentage is too small to really use which is why I leave out the little stuff - 0.000684 %
• Bathroom renovated $10,000 / 146000
• New roof  $15,000 / 146,000

Sales price times % calculated equals the amount to enter for each item.

3. Items depreciate for different lengths of time. Say the dishwasher above is  now 8 years old. Then it would be already full depreciated and has no cost basis. You can check your asset sheets and see if you have any items that are so old they are no longer being depreciated. Mark those items as sold for zero. They went free with the house.

4. The Passive Activity Loss adds up through the years. Look at your Form 8582 from last year. You will see the amount for 2024 and you will see a line for all prior year unallowed passive losses. You want to make sure you are using the total of your passive losses because they are all deductible with the sale.

[user17729139211]

Hi Amy

With your answer to #2 you are contradicting what Diane advised, and now I am confused.

My original question was because adjusting the cost basis of the property caused an issue with the state return (see my original question). Diane's advice to add the 2025 improvements to the expenses was intended to circumvent this issue. 

It's also fully unclear WHERE YOU ENTER THE ADJUSTED COST BASIS. The Turbotax software does not ask this question in the interview. So I don't know how to do this in a way that will not throw things off. The original cost basis (plus depreciation) autofills/autoflows. I don't think it's right to change that figure, so: WHERE?

Thank you!!!

[MarilynG1]

If you made improvements after the property was no longer a Rental, before selling, don't add those as a depreciable asset in the Rental section.  They can be added to the remaining undepreciated Cost Basis or included in Cost of Sale.  

After reporting the 'date you stopped renting' in the Rental section, you'll report the sale as a Sale of Business Property under Business Items in the Income section. In that section you can enter your adjusted Cost Basis and Cost of Sale amounts. You'll also need to enter the amount of Depreciation Taken.

@user17729139211 

[user17729139211]

Hi,

Thanks for your answer, but  this is not the screen I get in the TurboTax Desktop Premiere version - in my program, the cost of the property has already been autofilled from the previous year's return, and I am first asked to "verify" that. Then there are a couple of screens asking about special handling, and I get to a "Sales Information" screen that asks me to allocate expenses between the house and the land. 

There is NO WHERE that the program indicates where I can "adjust the cost basis" from the previous year's information. It appears that this year's program has failed to account for this step.

So it seems that my only solution is to add the cost of improvements to the selling expenses, which I then allocate between house, land, and other assets sold along with the house (new heater, etc). But I feel like this inflates my "sales expenses" to an unusually high amount (we did quite a bit of improving) and might be a red flag?

[AmyC]

All of the advice does agree but there are different ways to enter things. I am sorry for confusing you with the idea of adding it to the basis. Whether you enter something as an asset and write it off or add it to the basis or add it to the selling expenses (as you mention), the goal is to have the accurate amount of income and tax showing on your return. You have a great thread here showing you have acted in full faith trying to prepare a correct return. Keep notes of how you came up with those dollars to add to the selling expenses. If your return shows the correct amount of income, you have nothing to worry about, even if the IRS asks. You are doing great!