Rental cost basis adjustment

[mws1]

I did a substantial remodeling of a rental property in 2019, then sold it later that year.  How do I add that to the cost basis of the property?

[KarenM90]

To enter your remodeling and rental improvements, simply follow the directions to enter your rental income and expenses. 

  Rentals are under Wages & Income Choose Rental, Royalties, and Farm

  Click on Edit for your rental property

  Choose Assets & Depreciation

  Add the Remodeling costs as a line item.  

Please see this article for more information on Rental Improvements:  Rental Improvements

[Carl]

You'll enter it in the assets/depreciation section. If the property improvements were done after the last renter moved out, and before you sold it, then it doesn't have to be depreciated at all. Just enter a business use percentage of 0% and it won't be depreciated.

If the program "insist" that you have to enter a business use percentage greater than 0%, then enter 1% and give it an "in service" date that is the same date you closed on the sale. No depreciation will be figured that way either.

Once you have the assets entered, here's how to report the sale.

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.

[nutbrain]

Now lets complicate the rental improvement then sale scenario with a 1031 exchange instead of a regular sale. How do I approach that? Same as Carl's fab answer? Also have questions about which exchange expenses can be deducted on both ends of the exchange.  If I did a seller credit to buyer for their closing costs paid for with additional funds I put into escrow, can I adjust sale price for that? And what about appraisal and home inspection fees paid outside of escrow (that were not loan related, but to make sure I was making a good investment) on the replacement property purchase side?

[ThomasM125]

When you sell business property, you will be given an option to indicate that it is a like kind exchange i TurboTax:

You'll be asked to enter the adjusted basis of property given up, fair market value of property given up, and the value of any loans you gave up as part of the exchange. You'll also be asked for the fair market value of the property you received and any loans assumed. You'll also be asked to enter the amount of any cash you received, as well as the amount of sales expenses.

When finished, the basis of the acquired property with be the basis of the exchanged property, adjusted for any unrecognized gains or losses. 

[ual777cap]

When you buy a new property in a 1031 exchange and add additional money to the sales proceeds for the new purchase, does this adjust the basis for a future sale?

[ThomasM125]

Yes, the money paid would be added to the basis of the property acquired.

[ual777cap]

How would you show this adjusted basis when you report the present sale?  Turbo tax doesn't address this.

[MarilynG1]

In the Like-Kind section in TurboTax, you can enter the Adjusted Basis for the property 'given up' (screenshot). 

Click this link for more info on How to Enter a Like-Kind Exchange.