What do I do with improvements when I sell a rental property?

[shirak16]

I made improvements to a rental property, including adding a roof, and then sold it in the same year. TurboTax tells me to add the roof as a separate asset, which I've done. Do I then need to sell this asset? Do I say I sold it for $0? Some of the answers say to also report the improvements as part of my adjusted basis. It doesn't sound correct to report it in both places (as an asset and as an increase to basis). Which one is correct?

[KittyM]

Either could be correct.  If you made improvements to the property while it was a rental, you would list this as an asset - and depreciate it.  When you sell the property, you would "allocate" (assign a portion) of the sale price to the roof.

For instance, if the property was $95,000 and the roof was $5,000, then 95% of the sale price would be allocated to the house, and 5% to the roof.

However, if you are just fixing it up after the renter moved out to make it easier to sell, you could add the cost of those improvements to the adjusted basis of the house when you sell it.

You know the facts and circumstances, so you get to decide which is the correct treatment - but you can't do both.

[cmhawkins331]

where do I list a second home that was a rental that I sold.   >

[stevekayak]

@KittyM 

Hi Kitty.  If my last renter moved out end of Sept. 2018, then major improvements took place through March 2019 and sale occurred in May 2019, how do I account for the siding, carpet, flooring etc. improvements being replaced in Fall 2018 and into 2019?  They were large expenses, greater than $35k.  I added them as depreciable improvements in 2018 but now, in 2019, I am getting hit with the higher depreciation recapture tax vs. capital gains.  My depreciation schedule on all items ran until the house sold and I'm realizing now, I maybe should have stopped depreciation on the date of the last renter moving out.  All tolled, I have accrued about 7k in extra depreciation that I would rather see on the capital gains side of the equation, for the 2019 sale, vs. additional depreciation recapture.

Would it be better to amend 2018 and expense all those improvements, with perhaps a loss carry-over to 2019, and put it against the gain on the sale? 

How do you tell TTax that it stopped being rental property (and halt the depreciation schedules)?  We have never lived in it; do I "convert it to personal use" on tenant move-out date? 

Does it have to be 'converted to personal use" in order to do that?  All the expenses continued after rental period - utilities, mileage to/from, supplies, etc. etc. and I still want to be able to expense all those items in 2018 and 2019 respectively.  Is there a 'middle' way to tell TTax > it is still investment property but not being used for income purposes or 'personal use'?

The fact that the income generating part stopped in one tax year but some of the improvements and sale occurred in the following year have me guessing.

[JamesG1]

These are the options for disposal in TurboTax Home & Business at the screen Tell Us More About This Rental Asset:

“The item was sold, retired, stolen, destroyed, disposed of, converted to personal use, traded in, or given away (or it’s no longer being used in this business for some other reason).”

Then you would elect the date the renter moved out.

The depreciation would still need to be recaptured upon sale of the asset in 2019.

[Carl]

If between the time the last renter moved out and the closing date of the sale you did not live in the property as your primary residence, 2nd home or vacation home, the sale is reported in the Rental & Royalty Income (SCH E) section of the program.

If after the last renter moved out you made property improvements and then sold the property, the property improvements are *STILL* added in the assets/depreciation section. However, since you did not rent the property after completing the property improvements (because you sold it) you will enter a ZERO for percentage of business use of that property improvement.

This will add to the cost basis of the property as it should, yet the specific property improvements will not be depreciated since they were never placed "in service" and rented out to a paying tenant.

Depending on one's specific and explicit situation, there are those situations where the program will not accept zero percent business use. In such a case, enter 1% business use and make the "in service" date the date you closed on the sale. That way, if any depreciation is taken, it will only be a few bucks, and who cares.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will ahve a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.