I'm selling a rental property on schedule E when calculating basis do refinance costs, closing costs increase basis

[cbusa]

I'm selling a rental property on schedule E, trying to calculate my basis. I am realizing there were a lot of improvements I made costs incurred that I didn't pickup on schedule E at all. Can I add these improvement costs to my basis in terms of capital gain? Where in turbotax do you enter this adjusted basis? I refinanced several times and had decent costs each time to do are any of these costs eligible to be added to basis? Depreciation taken on schedule E reduces my basis? Closing costs (title fees, commissions, etc) to sell can these be added to basis?

[DianeW777]

No.  The refinance fees should have been placed on depreciation/amortization when the refinance occurred.  It would have been entered as an asset selecting Intangibles, Other Property, then amortized over the life of the loan or until the property is sold.  

Each time you refinanced with a different lender you could have expensed the balance of those fees in that year.  For each refinance that was with the same lender, any remaining refinance fees would have been added to the current refinance fees and then amortized over the life of the new loan.

Example of Refinance Fees for Rental: 

Unlike your primary residence, where you can only deduct qualified points and interest, you can deduct all costs associated with obtaining a new mortgage for your rental property. Typical loan-related expenses include:

• Points
• Loan origination and loan assumption fees
• Mortgage insurance premiums
• Application fees
• Credit report fees
• Appraisal fees (if required by the lender)
  • NOTE: Any refinance fees that were never deducted could be taken on an amended return if you are within the three year statute. (2018, 2019, 2020).

At this time, you can add the fees that would be current (based on the information provided above) as an asset for your rental, then use the following steps to deduct any remaining fees at the time of sale. This will allow a deduction in 2021 for any amount that would still be remaining had you entered the asset in the year when the most recent refinance occurred.

• Deduct the balance of the refinance fees when the rental is sold: In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your fees.

1. On the 'Review Information' screen click Continue.
2. On the 'Did you stop using this asset 2021?', click YES.
3. On the 'Disposition Information', in the disposition date box enter the date you closed on the sale. > Continue.
4. On the 'Special Handling Required?', click YES.
5. On the 'Depreciation Deduction Amount', select Transfer These Fees For Me To Other Expenses. > Continue.
6. You'll see the remaining fees of the refinance loan to be deducted in the Rental Expenses section. The entry will start with 'Unrealized Refinancing Fees....'

Yes, the other closing costs that are required as part of the purchase would be added to the cost basis (this should have been done when the property was purchased).

No, capital improvements should have been entered as an asset when they occurred or when you placed the property in service for rental, if paid before it was a rental property. The IRS rule for depreciation is use it or lose it.  If it was allowed and you didn't take it, they consider that is was used (allowed or allowable).  

1. Enter capital improvements as assets.  
   1. For each year you had a capital improvement add an asset for the cost and use the correct year for the date placed in service.
2. You will need to prorate the selling price and selling expenses to each asset in your rental activity including the land.  
3. Go through each asset and select This item was sold…….   And continue to answer the questions.

You might also review information here.

Next will be an example of how to prorate these items.  For any asset, such as appliances, that really have not value because they are past the recovery period of five years you can use a zero.

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

If you would like to be able to deduct the depreciation you never used, you can request a change in depreciation accounting by using the following information.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2021 tax return.

1. Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
   • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
2. You must use the TurboTax CD/Download version to complete this form. TurboTax does not help you with this form. And your return must be mailed because this form is not supported through e-file.
   • How do I switch from TurboTax Online to TurboTax CD/Download?

This must be completed and filed with the return on time.

[cbusa]

Thanks very helpful! In turbotax where it says Asset Sales Price (Business Portion Only) and Land Sales Price (Business Portion Only). If the home sold for say $450k and the land is worth $250k would you put $200k in the asset sales price, and $250k in the land sales price?

[JulieS]

Yes, that is a reasonable way to allocate the sales price. 

[Carl]

  I refinanced several times and had decent costs each time to do are any of these costs eligible to be added to basis?

No. Refinancing costs are supposed to be amortized and depreciated over the life of the loan. They have no effect on the cost basis of anything.

Depreciation taken on schedule E reduces my basis?

That's one way (and the most common way) to look at it.

Closing costs (title fees, commissions, etc) to sell can these be added to basis?

Sounds more like sales expenses to me, and nothing that would change the basis of anything.

If the home sold for say $450k and the land is worth $250k would you put $200k in the asset sales price, and $250k in the land sales price?

Some of that $200k for asset sales price will need to be allocated to any other assets.

Remember, if you sold at a gain then you need to show a gain on each and every asset. Otherwise, the recaptured depreciation will be included in the capital gain an taxed at the higher capital gains tax rate.