How to calculate adjusted cost basis for an investment property?

[Badjiannr]

Hi, 

1. I bought a house in 2016.

2. Between 2016 and 2019, I rented it and declared the rental revenue and expenses on a Form 1040 - Schedule E

3. In 2019, I demolished the house and started the construction of 2 units on the lot

4. From 2019 to 2024, construction is ongoing. I incurred $1.3M of expenses with 99% of receipt for it. I did not declare anything related to the property during those years as there were no income.

 5) In 2024, I sold one unit.

My question are the following:

a) to calculate the gain/loss now that one unit is sold what basis should we take?

Fake numbers for illustration:

Price of purchase in 2016 = $300K

Adjusted basis at the end of the rental period = $350k (improvement, depreciation...)

Once the house is demolished, do we start from this basis of $350k to calculate the gain/loss?

Or do we need to know the price of the land only as the house is demolished? Then, should we use the FMV of the land as of 2019?

b) can I wait to sell the other unit in 2025, or do I need to declare the sale in 2024 even if I keep incurring costs on the other unit?

c) I think it would fall under capital gain, but just wanted your opinion. 

Thank you so much in advance for your help,

[Mike9241]

you cost basis is what you paid originally plus

the cost of improvements plus

demolition plus

other capital costs the $1.3M other than real estate taxes and interest on any loans related to the property.

Do not reduce by depreciation that is handled separately and is subject to 1250 recapture

(IRC 266 requires that each year an election be made to add these costs to basis (specifically (b)(1)(ii)

Each of these items above needs to be allocated between the two units. The allocation can be done using any reasonable method. In addition, you get to report selling costs

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how to enter in Turbotax > Business items> sale of business property> 

check sale of business property / rental property. this may be the only method where you can and must report the depreciation taken allocated to the unit sold

then enter

description

dates acquired and sold (acquired I would use the original purchase date)

the sales price (note if this is an installment sale use form 6252 instead)

the allocated cost

the allocated depreciation