How are capital improvements added to the cost basis in turbo tax?

[aem1337]

I sold my rental property in 2020; I made two major improvements to the property in 2019-a bath reno and HVAC furnace replacement, totally about $11,000.

When I filed my taxes last year (tax year 2019), I added both as assets, under the subcategory of “Appliances, carpet, furniture” and they were depreciated over 5 years.

Since selling the condo in 2020, I thought the cost of these improvements would be added to the basis of my property, but the only thing that increased my basis (I reviewed the form 4797 for this info) was the closing costs I incurred when I sold the property.

Should I expect these “assets” to increase my basis dollar for dollar? If so, how is this info entered? Does Turbo Tax add it to the basis automatically (assuming it's entered correctly)?

After doing a lot of reading, I thought maybe the problem was that I classified them incorrectly under asset type, so I went back and made changes.

When adding an asset, the first screen asks, Describe this Asset.

I selected the first option, “Rental Real Estate Property” for both bath reno and HVAC furnace.

The next screen asks, How would you categorize this asset?

• Residential Rental Real Estate
• Appliances, carpet, Furniture
• Land Improvements

Which should I be selecting for each of the improvements? As mentioned above, in 2019, and initially when doing my 2020 taxes, I selected “Appliances, carpet and furniture”.

I changed the “Asset Type” for both to Asset Type: I-Residential Rental real estate”. They are now depreciated over 27.5 years with SL as depreciation method.  Making this change did not increase my basis though.

What am I doing wrong (other than trying to do this myself!)? Shouldn't my basis automatically increase with capital improvements?

[ThomasM125]

You need to classify the property based on what it is. The bath renovation would be an Improvement and the HVAC would be Residential Rental Real Estate Property and then Appliances, Carpet and Furniture.

To report the sale of the assets, you would edit each one and when you see the screen Tell Us More About This Asset you will indicate that The item was sold, stolen, disposed of, etc... As you work through that section, you will have an opportunity to enter the portion of the sales proceeds that apply to the asset.

[aem1337]

Thank you for your response. A couple questions for you.

1. In terms of the bath reno, I don't see a selection for "Improvements" other than "Land improvements." Am I missing another selection?  

2. How do i know how much of the portion of the sales proceeds to apply to each asset? Would it be the cost of each asset?

Is there a resource that spells out the directions in a step by step manner? I expected the turbo tax premier software to provide more guidance/ask me more questions to get to the correct answers but that is not the case.  This community is the only place I can find answers thus far.

Thank you!

[DaveF1006]

Yes, all capital improvements must be accounted for separately so these can be depreciated accordingly. You are in luck. I will provide you with a step by step process so you can happily report these in your return. You are the first to witness my step by step instructions.

1.  Select the federal tab, then go to wages and income.
2.  Scroll to Rentals, Royalties and Farms click on the drop down that says show more
3.  Select Rental Properties and Royalties (Sch E) Select start
4. Then you will go through a series of questions regarding your rental property.
5. Once these questions are answered, Turbo Tax will take you to a Rental Summary Screen. Note, you may have this information recorded already.
6. From this screen, select Assets/Depreciation> select start
7. Select yes when the program asks you if you have assets for this property that can be depreciated
8. I would start with entering information about the rental unit itself. Once you complete this, the program will take you to an asset summary screen. Here is where you can add additional assets such as appliances, carpeting, etc. This includes bath reno. In tax terms, consider these depreciable assets rather than improvements.
9. I would consider bath reno as Residential Real Estate since it is a part of the permanent structure of your house.
10.  Now how to assign the sales proceeds values to your assets. This is a gray area that requires a great deal of speculation since there is no Standard Operating Procedure. I have included this TurboTax link as a guide.