Calculating capital gains for primary home converted to rental property - land value in cost basis

[TaxWander]

We have a home that was our primary home for 2 out of the last 5 years. 2 years ago we put the house up for rental and we are considering selling it now. So the house qualifies for the 500k capital gains deduction as a joint return.

my question is about calculating the capital gains on the house. 

The house was purchased for 400k. We made 40k of improvements before putting it up for rent. 

when our taxes were filed 2 years ago at the start of the rental, we used 300k as the costs basis (100k land value was deduced) and reported that as the cost basis to the IRS. 

I now know I made a mistake by not including the 40k in improvements. My understanding is that the only way to correct it is to go back and file a 1040x for the last 2 years to correct the costs basis and depreciation for that 40k. My first question is, can I do it through Turbo Tax myself without a CPA? Am trying to figure out how much tax would I save by doing it?

the second question, what happens to the 100k in land value that I deducted from the purchase price while calculating my costs basis?

im trying to figure out if we are selling our house for 900k, that represents a 500k gain from the purchase price and that should be tax free based on the joint couple returns exclusion from the IRS. 

However my costs basis declared to the IRS is 300k.

1. How do I calculate my net capital gains so the I know how much tax should be withheld at closing?

2. and more importantly how do I tell the IRS about it ? Is the 100k land value lost or is there a way to report it to the IRS even though my cost basis reported at the beginning was 300k?

[Mike9241]

Failure to take depreciation when a rental property is what the IRS refers to as an improper accounting method. To correct this form 3115 must be included with any original or amended return.

here's a link to see the form and decide if you want to use a pro or do it yourself. also, read the instructions for the filing requirements and completion of the form 

https://www.irs.gov/site-index-search?search=3115&field_pup_historical_1=1&field_pup_historical=1 

when you sell the property, depreciation recapture kicks in before the home sale exclusion. Depreciation recapture is the larger of the depreciation you actually took on the property or if you took less than the minimum permitted by law the recapture would be the minimum allowed. If you do not file the form then you recapture the minimum allowed but can't take a correcting deduction for the missed amount 

so you have a $400K house + $40K in improvements less the depreciation you should have taken while it was a rental. This is your tax basis

your gain is the sales price less the selling expenses less your tax basis.  

your gain consists of  

first depreciation recapture. section 1250 gain which is not tax free. 

then any remaining gain is eligible for the $500K home sale exclusion

in TurboTax on the asset worksheet for the property you should have entered $400K for the cost and then there's a line for the land value for which you should have entered the $100K. this would result in $300K being depreciated. also as a separate asset you'll now have the improvements.

in TurboTax you need to allocate the selling price and selling expenses among the components 

do the form 3115 is require 

[TaxWander]

Thanks. If I decide not to amend the prior returns, I’m trying to understand what happens to the 100k land value? Can I use that when selling the house? Is the land value reported to the IRS? In my case above what would be my rough capital gains if I decide not to amend my prior returns? I’m trying to see would I be under the 500k limit or over ? (I undertand the depreciation capture is a subject to taxes either way).

[Affordabletaxes2021]

If this was rented out for longer than you lived in it then you need to account for the unqualified days (days rented) in your computation of gain or loss

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