Can I include an equity loan as part of the cost basis for capital gains? Purchased in 2004, converted to rental in 2008, sold in 2017. Equity loan in 2006.

[vancecs]

I did put about $15,000 of improvements into the property over the years.  The equity loan was not used for any of these improvements. 

[jtax]

Loans are never basis. What you spend the loan proceeds on might or might not be basis. 

In your case, if you spent $15k on improvements (renovations, appliances, etc.) that would indeed increase your adjust basis by $15k. The source of that money doesn't matter if it is your money. If it isn't your money ask again. If you also took a $15k loan, you cannot double count and get a $30k basis increase. Only what you actually spent on improvements.

Your basis also includes your purchase price in 2004 plus expense. It doesn't matter if you paid those costs in cash or loan proceeds or a combination.

[vancecs]

I might have confused you w/ the improvements info.  Let me ask another way:  Is the "original price" of the property = "original mortgage" + improvements; or "original mortgage" + improvements + equity loan?

[jtax]

neither. the loans have nothing to do with basis. They are not an expense. (That is why they are not income when you get a loan. Your wealth has not increased. You get money but you have an offsetting debt, so your net worth does not change.)

Your capital gain = net proceeds - adjusted basis

adjusted basis = original cost + cost of improvements

original cost is the price you paid for the property including most closing costs.

So if you buy a rental property for $100k with $3000 of purchase expenses (commissions, transfer taxes, home inspection, etc.), putting down $23k and borrowing $80k, your cost is $103k (+ expenses to buy). For capital gains it doesn't matter if when you sell there is a $70k mortgage balance or a $0 balance. The mortgage loan is irrelevant to basis. How much cash you take away when you sell is also irrelevant to your gain.

You will find your purchase cost in your closing documents from the sale. Most expenses in those docs will be costs. e.g. transfer taxes, commissions, home inspections, lawyers fees, etc. The only things that would not be would be things you could deduct at the time (real estate taxes paid to the seller, mortgage interest, etc.)

For personal-use property converted to a rental things are more complicated. If the property has gone down in value your basis for depreciation is the lesser of your adjusted basis at time of conversion or the fair-market value and depends upon the value of the land (which can't be depreciated). For some details see these articles. This is complicated enough that if you did not consult a CPA, enrolled agent, or tax attorney at the time of conversion to rental property to get the depreciation correct, you should do so now to make sure the sale is reported property.

<a rel="nofollow" target="_blank" href="https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/09/17/tax-implications-fo...>

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[TaxGuyBill]

Due to the timing (conversion to a rental in 2008), I want to emphasize that last point that jtax made.

If the Fair Market Value in 2008 (when it was converted to a rental) was LESS than the Basis at that time (original purchase price plus cost of improvements before that time), it gets more complicated, and TurboTax does NOT support some of those scenarios.

You may want to go to a tax professional this year.

[Pcos15]

I understand you can’t include the amount of a home equity loan to increase your cost basis when you sell. However, can you include the closing costs you paid on that loan when determining your cost basis?

[ErnieS0]

Yes. You can add certain closing costs to the basis of your property @Pcos15.

The following items are some of the settlement fees or closing costs you can include in the basis of your property.

• Abstract fees (abstract of title fees).

• Charges for installing utility services.

• Legal fees (including title search and preparation of the sales contract and deed).

• Recording fees.

• Surveys.

• Transfer taxes.

• Owner's title insurance.

• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

See settlement costs

[Carl]

For the purpose of reporting the sale, your cost basis in the rental property is:

What you paid for it when you originally purchased it.

plus

What you paid for property improvements during the period of time you owned it.

minus

any monies received in an insurance payout that was "NOT" used to repair/restore/replace the property.

That's it. Where the money comes from does not matter.