Adding the Cost of Improvements to Basis upon Rental Property Sale

[infodoc]

I believe that the cost of improvements made to a rental property are added to the basis upon the sale of that property, in order to determine profit or loss. That is not the question.

Here is the question. Lets say an owner does Project A to a property. Project A is a true improvement, not a repair, which costs $2000. The taxpayer elects to deduct, rather than depreciate, that $2000 by virtue of using the small taxpayer or de minimis safe harbor.

In the future the owner sells the property. Does that $2000 get added to the basis to in determining the profit or loss? On the one hand it seems it should, as it was an improvement. On the other hand maybe it shouldn't, as it was deducted rather than depreciated. Or, put another way, does the decision to add the expense, or not, to the basis depend upon the work itself or how it was accounted for in the tax return?

This is NOT a question about what is an improvement vs a repair: assume the expense is an improvement.  This is not about the safe harbors themselves: assume the deduction was done correctly. 

Thank you in advance for your time and attention.

[ColeenD3]

No, if you choose to take it as an expense, it is an expense and no longer an asset. You can't add it to the basis.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 
  • 2% of the unadjusted basis of your building or
  • $10,000

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms

[Carl]

Those property improvements that you elect to treat as an expense under Safe Harbor Di-Minimis can never be added to your cost basis. You've already deducted them, and you can't deduct that cost again by using it to reduce your gain or increase your loss on the sale.