In 2018 I spent $25,000 on a mold remediation issue on a rental property. In 2019 I did a 1031 exchange. Does the mold remediation affect my cost basis?

[NCperson]

did you claim the $25,000 as an expense in 2018? 

[Carl]

Does the mold remediation affect my cost basis?

At that price, yes it can if you deal with it correctly. I would treat it as a property improvement because it most likely meets the requirements to be classified as a property improvement.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Since there is no question the "treatment" became a material part of the property, and there's no doubt a property appraiser gave it a higher value after the treatment, I'd treat it as a property improvement that gets capitalized and depreciated over time. Just enter it in the assets/depreciation section of the program.

If you did not rent or attempt to rent the property after this was done, then give this particular asset a business use percentage of zero percent with an "in service" date of the date of exchange. That way, it won't be depreciated at all and the total cost will just be added to your cost basis.

For some, for reasons unknown, the program won't except zero percent business use. If that happens to you it will accept 0.1% (zero point one percent) business use and if any depreciation is taken, it will only be a few bucks and it won't have any impact on your tax liability.

[johnny_goochie]

Yes

[NCperson]

WHY did you spend the $25,000 on mold remediation?  Was it in anticipation of selling the property? or was it simply to maintain the property?  The difference is whether the cost is an expense (which is to your advantage) or an improvement (which is subject to depreciation).   

it can be a 'squishy' discussion which way to account for it, but there may be some flexibility.  One example: see this link.  If in anticipation of selling, it's capitalized, otherwise, there is an argument for an expense.

https://bradfordtaxinstitute.com/Content/Mold-Removal-Repair-Expenditure.aspx

[johnny_goochie]

The tenant didn't notify me of the mold situation until it was pretty bad.  That's why the mold remediation was $25k.  I had not plans to sell the house at the time, but this thing started turning into a money pit, so I finally decided to sell.