Allocating sales price to individual assets when selling a rental property

[trungson]

Hello,

I have a question with specific numbers about how to allocate sales price ($900k) and selling expenses ($40k) to individual assets when selling a rental property (bought 2015 for $500k, sold in 2025 for $900k).

Let's say the cost basis:

- $300k for land (2015)
- $200k for building (2015), depreciation taken $70k
- $20k for kitchen remodel (2017), depreciation taken $5k
- $30k for roof replacement (2024), depreciation taken $1k

Total original cost basis is $550k (but at different time, new roof is less than a year-old when sold). Do I use the percentage of the original cost basis or the adjusted cost basis (original cost minus depreciation)? Form 4797 Part III line 21 and 23 include sales expense in adjusted cost basis.

Or do I use the FMV in 2025 (county assessor for property tax purpose use $700k for land, $200k for building+improvement)? But then how much to allocate for kitchen remodel and the roof?

Thanks

p/s: some numbers are rounded/approx. for simplicity so depreciation schedule might not checkout

[ThomasM125 · Accepted solution]

The sales proceeds should be allocated based on the current fair market value of the assets being sold. It is likely the Kitchen remodel is worth its cost less depreciation, as that would not likely increase in value over time. The same would hold true for the roof. So you could value those at book value and allocate the rest to the building and land based on the property appraiser value percentages.

The sales expenses would be included in the cost basis.

[trungson]

Thanks for the answer. TurboTax asks for selling expense for each asset sold, how should I break the 40k total selling expense down to individual assets? Is it zero for kitchen remodel and roof ?

Thanks

[ThomasM125]

Yes, that will be fine.

[trungson]

Here is what I have based on your guidance. Zero gain and zero sales expense for all but the land & building. Does this look right? Thanks

Asset       Cost            %             Sale_Expense    Depreciation_Taken    Adjusted_Basis    Sale_Price    Capital_Gain
Land           $300,000    77.78%    $31,606          $0                          $331,606          $700,000    $368,394
Building    $200,000    22.22%    $9,030             $70,000                $139,030       $156,000    $16,970
Remodel    $20,000     0%             $0                   $5,000                 $15,000             $15,000          $0
Roof            $30,000     0%             $0                   $1,000                $29,000             $29,000          $0
TOTAL        $550,000    100.00%    $40,636    $76,000                $514,636          $900,000    $385,364

[PatriciaV]

Yes, allocating sale proceeds and selling expenses as you have appears to result in an accurate calculation of capital gain for this sale.

[springdawnct]

please explain how to "So you could value those at book value " in TT.  and how to handle the improvements which has not been added for depreciation in prior year, while filling for the sale.

[RobertB4444]

The book value is the value that you paid for the items.  When entering them into the TurboTax system to depreciate them the book value is just the value that you will enter for depreciation.

In the case of the sale you can enter them as part of the asset value at the point of sale as additional property or create a new asset with the date placed in service just prior to the sale and then include them as part of the sale.  

That is true of the renovation that you are asking about as well.

@springdawnct