Cost basis conversion

[jonpagel]

Bought a house in 2007 and lived in it till 2012….converted to a rental….sold in 2022….

*purchase price $507,000 in 2007 plus $20000 in capital improvements prior to renting

*sold in 2022 for $850000 minus $80000 in selling expenses

so turbo tax brings in from 2021 a cost of $425,000 and a land value of $250000…..so it is using the difference as a basis?  Since I had a gain I feel the basis should be the 507,000 plus improvements?  Thanks

[GeorgeM777]

Need some additional information.  As this was a rental, did you depreciate the property beginning in the year you made the property available for rent?  If yes, what was your cost basis when you began to depreciate the property?  How much depreciation did you take prior to the sale? 

@jonpagel

[jonpagel]

Hello, it is using the $425,000 cost and $250,000 land value that I entered when I converted to rental and has been depreciating off that since 2012, roughly $65,000….the $450,000 was the FMV at the time of conversion but since I have a gain it seems like the cost basis can be the original cost when I bought it plus capital improvements prior to the conversion which would be $507,000 and $30,000….doesn’t seem to be a way to make turbo tax do this easily or at least with my experience using it…the unit was rented from the 2012 conversion until June 25 2022, I listed it and closed on the sale roughly 2 months later in august 2022

[AmyC]

You are correct. You will use the full amount of your basis to reduce your gain. There used to be a box to enter an alternate basis but that confused people. You want your 1099-S to match the sales proceeds. The workaround would be to increase your sales expenses by the additional basis so that the correct gain is recorded. While not ideal, the proper tax would be paid.

[jonpagel]

Thanks for the reply….so my basis is the $507,000 purchase price plus closing cost plus any capital improvements correct?  But that price includes the land value which I include or exclude?  Like I said the FMV turbo tax has is $425,000 cost with land being $250,000 of that, those are the numbers I see in the asset information screen as I click thru the screens thanks

[AmyC]

Yes since your basis was greater than FMV, the lower value was depreciated and you need to decrease your capital gain by that difference.

Your basis is the total price (house and land) plus improvements minus depreciation. The program is handling the depreciation part for you.

See Publication 551 (12/2022), Basis of Assets - IRS

[jonpagel]

Ok great that makes sense….couple more questions if you have time….the renters moved out June 24 and I closed on the house august 15th…..should taxes and insurance and such be prorated for June 24 or do I put in the whole amount paid until I closed the sale?  Maybe when it was waiting to list and close those taxes and insurance are selling expenses instead?  
also I spent a few thousand on landscaping and a new kitchen faucet and such after they moved out and before I sold it….are those rental expenses or selling expenses?  Thanks!

[JulieS]

No, your taxes and insurance don't need to be prorated in this case and can be used as rental expenses.  

The landscaping and a new kitchen faucet increase your basis as long as they increased the value of the home.