Calculating cost basis on investment property when I depreciated renovations

[Zeek77]

If I did renovations on an investment property that I depreciated separately from the original property depreciation, when I go to sell said property, can I add the cost of those renovations to the cost basis? I understand I need to do the depreciation recapture, but can I also add the cost of those renovations to the cost basis? 

[JohnB5677]

Yes,  your cost basis will include the purchase price of the property, plus the full value of any renovations.

Over time you will depreciate both the property (Not land), and the renovations.  As you said you will incur "depreciation recapture" when you sell the property.  This will be applied against the full cost basis of the property including renovations.

Additional closing costs that are  included in Cost Basis are: (Often called Abstract and Recording Costs)

• Tax stamps,
• Attorney fees,
• Title insurance,
• Title search and
• Document preparation fees.

These are often posted to the original purchase of the property.

[Zeek77]

Thank you! That answers my question.

I have a follow up question that maybe you can help me with. This investment property I speak of is a shotgun double (duplex) and I lived on one side. I understand I need to treat each unit differently, one is personal, the other investment. Over the years, I depreciated the property (not land) as a proportion of the square footage of each unit's living space. I also kept records of all the improvements where a majority of them were for the unit where I lived. Can I simply add up all major improvements for both units and add that to the purchase price to increase my overall cost basis, and then proportion up the rental's cost basis after that? (Add of course make sure I am recapturing all of the depreciation)

For the improvements that were unit specific, and not for the entire property, I just don't think it is fair to apply those independently to each sides cost basis, because the both units are sold together at the end, with no way of knowing how the overall sale price was effected by one sides renovations. If that makes sense. 

[ColeenD3]

You said, " For the improvements that were unit specific, and not for the entire property, I just don't think it is fair to apply those independently to each sides cost basis, because the both units are sold together at the end, with no way of knowing how the overall sale price was effected by one sides renovations."

No, it is absolutely fair to treat them differently. The sale of your personal side is straight-up capital gain or even exclusion of capital gain.

The rental side is a combination of capital gain (possibly) and ordinary income. There are calculations made on Form 4797 that determine what amounts are treated in what ways. These are two separate properties. One is personal, subject to certain rules, one is rental, subject to completely different rules. The fact that they are sharing walls is irrelevant.

[Zeek77]

Just to clarify, I understand they are treated differently for tax purposes. But do you understand the situation I am describing here? When I sold the property, I received one sale price, with no way of knowing how much value was given to the rental unit vs. the side I lived in. For example, and am exaggerating here, but say each side was split 50-50 per square footage. I purchased the property for 100K, and poured 100K in renovations into the side I lived in, and nothing into the rental unit. I then sold the property containing both the rental and personal units for 500K.  When you calculate the cost basis of the rental unit, with a 500K combined sale price, you end up with 250K-50K and show a gain of 200K. But for the personal side, you would end up with 250K-50K-100K(for renovations) = 100K gain.  That is clearly not fair for the rental side, because it doesn't consider that I put 100K in renovations that would have clearly led to the 500K sale price.  If I had not put in those renovations into the personal side, I would probably have sold it for say $425K, and then my gain on the rental unit would have been $425Kx50% - 100Kx50% = $162.50.  Which would mean the renovations I did on the personal side have led to 200K-162.5K = $37.5K in additional gain subject to the investment property capital gains. How can that be right?

[ColeenD3]

Because it is. You can't make up scenarios of how it could be different. You have to go by tax rules and what the facts are. The facts are that you improved the personal half, but not the rental half.

The personal side, with its $100 improvement, has a $100,000 gain and the business property, without any improvements, has a $200,000 gain.

[Zeek77]

How am I making up a scenario here? If that is the the way the tax rules are, fine, but then can we at least agree that it is not reasonable because the gain on the business side is partly based on the improvements on the personal side? The IRS says to treat each side separately, fine, no problem, but then all of a sudden when I sell the property, I have to assume each side gained in value the same % with no regard to how the improvements might have increased the value of one side more than the other? 

There are other situations where the IRS allows some subjective estimate of property values, like when you convert a personal property to a rental property and you have to estimate a fair marker value when you begin to depreciate it.