Disposing of improvements. What improvement classification do I assign certain improvements and practical impact to ensure it is correct

[RAH727]

TT has a drop down menu that extends from  A - Computer and Peripheral thru X - Non depreciated asset ... to classify each improvement when you initially brought it into service. 

I have numerous improvements that I made to a rental property ... that I recently sold.  TT requires me to dispose of them along with the residence.  These improvements include a built in microwave, new front door/fixture, new french doors, new roof, new driveway, new basement floor, new under cabinet lighting, and new wood floors.    I classified them with what I considered appropriate,  but some didn't seem to fit ... like a new driveway or new french doors.  What category would these be? 

Once you make your choice -- and realize it's wrong based on recommendations here -- is there any problem changing the classification now?

So regarding the  sale of my rental property and disposing of these improvements, I will use the wood flooring as an example.  TT shows the cost to be $3597 and the depreciation to be $2561.  When I tell TT that I sold the wood flooring, what would you suggest to put in the Sales price and Sales expenses block?

[KrisD15]

To clarify

Are you just now claiming the improvements to the rental property or did you list them when they were purchased?

Did you claim any of theses "improvements" as rental expenses the year they were done? 

Were these done in the final year before you sold? 

Did you use TurboTax to report your rental income in past years or did you use something/someone else?  

Do you have a list of depreciable assets or Form 4562 from last year? 

[Carl]

Read the below carefully. Then read it again and draw a line through the information that does not apply to your situation. Then read what is not lined through again, to ensure you understand it "before" you do anything.

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.

[RAH727]

The improvements were placed into service over the course of 6 years worth of ownership.  I entered them into TT that same year.   I kept improvement separate from repairs/expenses.

I have used TT the entire time of the rental.  

Yes, everyone of these improvements are delineated on the 4562 Depreciation and Amortization Report.

I'm struggling with disposing of each improvement.  I sold the house for $315,000.  I'm confused when TT asks me to specify a sales price and sales cost when selling the wood flooring improvement or the new driveway improvement.

[RAH727]

Thank you for your help.

I bought the property for $215,000.  I used a 72/28 ration of structure to land at that time of purchase.  That equates to a split of $155,000/$60,000

I sold the property for $315,000.  Using the same ratio, that leaves the structure valued at $226,800 and the land at $88,200.  

I did not live in the property 2 of the last 5 years.

I have selected the "I sold or otherwise..."  and entered the date of sale and answered NO to the question, " Was this asset included in the sale of your main home".   

So if I understand you correctly....  the entries that I input for "sales price"  for the sale of the structural asset itself PLUS every improvement should total $226,800.  Correct?  

For the "Sales Expense" block, I had planned to use the numbers taken from the settlement sheet on only the structure.

Please let me know if I interpreted your assistance correctly.  Thanks again.

I

[Carl]

the entries that I input for "sales price" for the sale of the structural asset itself PLUS every improvement should total $226,800. Correct?

yes, that's correct. Since you sold at a gain, it's important that you show a gain on each asset. Otherwise, depreciation recapture will be wrong, potentially resulting in you paying more taxes than you should.

Now when you add that total sales price of $226,800 to your sales price of the land, that total should be #315,000. If so, you're good to go.

[Carl]

For the "Sales Expense" block, I had planned to use the numbers taken from the settlement sheet on only the structure.

Since sales expenses applied to an asset are deducted from the sales price of that asset, make sure you still show a gain on the asset after subtracting the sales expenses for that asset.

[RAH727]

One last question about selling Improvements ...

You stated that if I made a profit on the house, I need to show a profit on each improvement ... even if it only a $1.  The total of all my improvements over 6 years was $33260.  My purchase price was $215,000.  My sales price was $315,000.   

I'm going to use the new roof I put on the house.  TT shows the following: 

Cost: $7368

Business Use:  100%

Prior Depreciation:  $3832

So going thru the improvement asset sales when I have to dispose of the roof,  TT asks me to enter:  

Sales Price:  ?

Sales Expenses:  ?

Am I suppose to show a profit on the original cost ... or use the figure after subtracting depreciation from original cost ... or .... ?

[Carl]

The total of all my improvements over 6 years was $33260. My purchase price was $215,000.

So your total cost basis is $248,260

I'm going to use the new roof I put on the house. TT shows the following:

Cost: $7368

Your sales price for that specific asset would be $7369 *OR MORE*. 

Subtract $7369 from your $315,000 sales price, and that leaves you $307,631 to allocate across the other assets.

When dealing with the sales expenses, you can apply those only to the main structure and the land if you want. Simpler to do that and just be done with those, in my opinion. Assume $5,000 of sales expenses. Don't know your exact allocation of your initial purchase price to the land. So I'm just picking numbers out of thin air for this example:

STRUCTURE COST BASIS: $180,000 Sales Price $200,000 Sales expenses $3,000

$200,000 sales price minus $3000 sales expenses minus $180,000 cost basis shows a $17,000 gain on the structure

LAND COST BASIS $35,000 sales price $40,000 Sales expenses $2,000

$40,000 sales price minus $2,000 sales expenses minus  $35,000 cost basis shows a $3,000 gain on the land.

At this point you have used up and claimed all your sales expenses. So nothing for sales expenses needs to be entered for the remaining assets.  Of the 315,000 sales price you've only used $240,000 of it on the structure and land. The remaining $75,000 of the sales price is still left to be used across the remaining assets and you can show $0 sales expenses on the remaining assets, since all your sales expenses were used up on the main structure and land.

[RAH727]

Thanks to everyone for your help!