I sold a property that was rented. Can I now change the cost basis to account for landscaping (depreciation will not impacted as its part of land) done prior to renting?

[babypanthers]

TurboTax is automatically picking up the cost from the 2023 return. However, the cost does not include the landscaping cost done prior to renting. I never provided the landscaping cost when I started renting the property in 2014 as it does not come into play when calculating the depreciation (as landscaping is considered to be a part of the land). So when I report the sale in 2024, I just want to update the "cost" so that capital gains is correctly calculated. There will be no impact to depreciation because of this. Can I just updated the "cost" and "cost of land" in the TurboTax "Property Assets" section on the 2024 tax return? Thanks.

[MaryK4]

Yes, you can add the landscaping to the basis.  However, you will add this to the Cost in the Sale of Business Property section (see below).  If you add it in to the Cost/Land Cost in the Rental Income section, it will make the adjustment on the Form 4562.  

[babypanthers]

Thank you so much. Since I have already entered the sale in the "Rental Properties and Royalties" section, where do I enter the sale in the "Business Property Section"? Currently, I have not selected anything in the Business Property Section. 

[MaryK4]

It will be under Other Business Situations.  When you are in the Rental Properties and Royalties (Sch E), they do ask if you sold the property, so it may come up in the interview; but if it does not, look for the section as below. @babypanthers 

[babypanthers]

Thanks. As soon as I select "Sale of Business Property", what option do I select under the "Any Other Property Sales?" page? If I try to report the sale under the "Sale of Business Property" section, TurboTax treats it as a separate sale and increase my capital gains tax due? Any suggestions? Thank you.

[babypanthers]

Hi @MaryK4 . Also, just to let you know, under the "Your income and expenses" section, a row for "Sale of Business Property" is automatically created and the gain for that row is automatically populated from the sale I reported on the Rentals and Royalties section (that does not include the landscaping cost). However, there is no way for me to update the entry in the "Sale of Business Property" section. I could update the "Cost" and "Land" values by the same amounts in the "Review Information" page in the "Sold Rental Property" section in the Rental and Royalties section. This will ensure the depreciation amount does not change. Please let me know what you think. Thanks.

[annieland]

Turbotax is really confusing with some relevant inputs being in the Sale of Business Property section while we are repeatedly instructed to use the disposition of assets in the rental property section.  I made this mistake last year when I was trying to predict capital gains on my upcoming rental property sale and saw a number that was like, WOAH no WAY.  Then I realized and started learning and fixing everything.

I'm no expert, and I haven't done it myself because I didn't do any landscape stuff, but did you try adding it as an asset in the Schedule E section and classifying it as a land improvement?  I'm sure you can still enter 2014 as the original date with the cost.  Perhaps the program knows not to depreciate?  If it does depreciate, then Thanks Turbotax! 😜

[annieland]

Actually, since I have like 10 dummy draft returns open right now as I'm trying to solve my own unresolved TT issues, I experimented with a land improvements and uhh... I think you may have had to depreciate it.  From the in-app help it says only raw undeveloped land isn't subject to depreciation (and recapture), but land improvements are.  It's in the "Any other situations to report?" section with the checkbox for geothermal or other non-depreciable assets.  IRS Pub 946 has more info, it seems to fall into Asset Class 00.3 with a 20 yr life.  Still adds to overall basis though!

[babypanthers]

Thanks @annieland , for your suggestions. Putting aside how to add the landscaping improvements to the cost basis, do you have any idea where TurboTax is getting the total cost (without the landscaping improvements)? I checked my tax returns for the year when I started renting the property, and I only see the depreciable amount reported on Form 4562. The total cost is not reported anywhere?

Do you know what will happen if the just update the "Cost" and "Land" values by the same amounts (to account for the landscaping improvements) in the "Review Information" page in the "Sold Rental Property" section in the Rental and Royalties section. This will ensure the depreciation amount does not change. Thanks.

[annieland]

Hmm.. Mine is listed on the main Asset Entry worksheet for the Residential structure.  I filled it out when I added the rental in 2019, and it asks for Total Cost on line 4 (similar to every other depreciable asset we enter over time) and then the amount for land on line 8.  I remember it was very clear on my property tax records how they split the percentage so I just went with that as I figured as long as I keep it consistent I should be fine moving forward.  So for me, TT has just carried over the building portion as the Total Cost (Ln 4) minus the land (Ln 8 ) and used it as the depreciable basis.  Do you have the land sale reported on Form 4797 Part I?

So check your Asset Worksheet somewhere underneath the Form 4562 in the Sch E section and see if it has a land cost on line 8 for the original house purchase.  Fiddling around I did see that form somewhere you could report a non-depreciable land asset and cost to purchase it as the same, but that looks a little too scary to me if it's not according to IRS guidelines.  If it looks like you're avoiding depreciation recapture it could flag something, especially if you're just now reporting the land basis on Form 4797 Part I.

[babypanthers]

Thank you for your response.

1. I must have filled in the 4562 worksheet when I started renting the property in 2014, but when I look at the submitted 4562 for 2014 now, I don't see the total cost listed anywhere on the form. It has the basis for depreciation, but that does not include the land value (which I feel is expected since land is not used to calculate depreciation). It is possible, TurboTax saved the total cost even though it was not reported to the IRS in 2014 and is using that for the sale now. Just like yours, it is listed on the Asset Entry worksheet for the Residential structure (but it was not on any form submitted to IRS). Does your 4562 for submitted in 2019 have the total cost listed?

2. My 4562 for 2014 has nothing on line 8 which corresponds to "Total elected cost of section 179 property. Add amounts in column (c), lines 6 and 7 ". I guess this is expected because I did not take the 179 election. Does your 4562 from 2014 have something on line 8?

3. TurboTax did not create a 4797 in 2014 (as I did not sell the property then), but it has created one for me now, but I have no way to look at the contents of the form. I think I have to first pay TurboTax before I can view the contents. Please let me know if there is a way for me to look at 4797 in 2014 or if I may be missing something.

Thanks again for all your help.

[annieland]

1. I don't think the 4562 is anything TT has you work on directly.  They transfer the information you enter on the asset entry worksheets.  It's just a means of reporting to the IRS that you've purchased something you are now starting to depreciate so when you sell they have their own record to depreciation recapture from.  My 4562 from 2019 only has the structure component listed just like yours.   Go find a Depreciation and Amortization Report that TurboTax prints every year for your records that has "4562" in the upper left hand corner, the one from 2014 will have the info on it, as will each one from the last 10 years you've owned the house.

2. I don't have anything on Line 8 either and I don't think I've had any 179 special election stuff with this house.  This was a family property I inherited and was pretty much a money pit for the 5 years I had it so not a ton was invested other than what was necessary (but still cost a lot!!).

3. Ok, it sounds like you may be using an online version then which I have never used.  I only use the regular desktop version because I check my forms constantly and having to modify them directly is not uncommon in more complicated situations.  So I'm sorry I can't be of more help in that aspect!  Hopefully someone from support will be able to help you with the online version because I'm more of a forms nerd :). 

[babypanthers]

Thank you @annieland . Appreciate all your help.