Depreciable improvement allocation for sold rental property

[Don-CNY]

I have looked at the TT instructions and other answers regarding sale of rental property and am still not clear on the proper way to document depreciable improvements as part of the sale. I initially thought I could simply allot a percent of the sale price to land and then enter the balance as the sale price of the house, along with sale-related costs. Then, because the improvements were already included in the sale price, I would indicate $0 as their sale price. I assumed TT would then take care of recapture of depreciation for all items. but I came across an opinion that I was supposed to somehow assign a value to each improvement as part of the sale price - which seems unduly complicated, and I'm not sure how I would assign a value. I am valuing the land as a percentage of the full purchase price equal to the percent assigned when I purchased the property.

I have handled my own taxes for decades, including two rental properties for the past 7 years, and was team lead at a TT call center, but this one is making my head spin. Please make sure you are qualified to give an accurate answer. Thank you. 

Addendum: I found a couple answers that somehow did not pop up before, which seem to indicate that TT will make an error if I assign a zero value to improvements when sold, so it appears I will indeed need to distribute the sale proceeds (minus land) across the improvements. But these instructions still leave me a bit confused When selling a rental property is allocating proceeds to land and improvements legal? (intuit.com) How do allocate rental property sales monies across different assets? (intuit.com)

[Mike9241]

yes you need to assign a portion of the sales price and selling costs to each separate asset (that could be zero if in your judgment the item is worthless). that's the only way you get the benefit of reducing the gain by any undepreciated cost.  I'm not saying this is right but professional tax programs allowed accountants to use a provision in the program that allowed for mass disposition.  thus the total sales price, total sales costs, total cost of the land, building and improvements, total depreciation were reported as a single item.  Turbotax for taxpayers doesn't allow this (its pro programs did at least at some point in the past).   you need to use your judgment but what the pro programs did was in effect like allocating total sales price and selling costs in relation to the original cost of each item.  

[Carl]

Below is the guidance. If you do not follow this guidance, then recaptured depreciation on assets you sell at $0 will be incorrectly included in the capital gains and incorrectly taxed at the capital gains tax rate.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING OR SELLING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."