Rental expenses

[dhilpert]

I have replaced the roof on my rental property several times but I never depreciated it. Now that I have sold it can I add it to my basis? If so, both times or just the last? TIA

[Carl]

I have replaced the roof on my rental property several times but I never depreciated it.

That's a no-no. While property improvements increase your cost basis in the property, not having taken depreciation is gonna hurt you in the wallet here. You are required by law to depreciate rental property assets. The roof should have been placed into service in the year-month it was completed if the property was classified as rental real estate at the time of replacement. So now, it's not as simple as just adding it to your cost basis. You're going to pay a price for not having depreciated it.

You must enter the roof in the assets/depreciation section and enter the actual date it was completed and placed "in service" as a rental asset. When asked to enter prior year's depreciation already taken, you'll enter a ZERO. That will cause the program to take all of the depreciation you "should" have taken in prior years., on the 2019 return.

Then when you report the sale the depreciation will be recaptured and taxed at a minimum of 15% and a maximum of 25%. The recaptured depreciation also automatically reduces your cost basis which means your taxable gain will be more. It will also increase your AGI for the year and potentially put you in a higher tax bracket. In a sense, you can look at it as, this is your "penalty" for not having claimed depreciation in prior years as required by law.

[DawnC · Accepted solution]

Repairs and/or maintenance expenses that were written off as expenses and not capitalized cannot be included in a property's cost basis, only capital improvements that require depreciation can be added to the basis.  

There is a little more to it than just adding the costs of depreciable property improvements to your basis.  You are required to recapture the allowable depreciation, meaning the depreciation you could have claimed, not the amount you actually claimed a deduction for.  So, even though you took 0 depreciation, you are not exempt from having to recapture it now that you have disposed of the property, unfortunately.  

TurboTax will do the necessary calculations to help you determine your basis adjustment.   This article explains the process in more detail - How Do I Handle Depreciation of Capital Improvements for Rental Property?

If you improve depreciable property (add a new roof), you must treat the improvement as separate depreciable property.   Each roof is listed as a separate asset of the property with its own 'placed in service' and 'disposed of' date.  Here is the IRS publication that explains this - How Do You Treat Repairs and Improvements?

[dghilpert]

Thank you. It's a very small house so the hit won't be bad. This just applies to the second roof, the first would be irrelevant?

[AmeliesUncle]

Correct, only use the current roof.

When you enter the roof as an "asset" and it asks for the "prior depreciation", you should leave that BLANK.  The program will then calculate what you SHOULD have taken.

If you want to correct the situation, you can 'catch up' on the missed depreciation by going to a tax professional that is familiar with Form 3115.

[tagteam]

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@AmeliesUncle wrote:

If you want to correct the situation, you can 'catch up' on the missed depreciation by going to a tax professional that is familiar with Form 3115.

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@dghilpert Read the quoted sentence by @AmeliesUncle carefully. If this involved a rather large expense, which I imagine it did, then you should seek professional tax guidance and/or preparation.

Filing Form 3115, as @AmeliesUncle suggested, would allow you to make a Section 481(a) adjustment in order to catch up with the foregone depreciation.

[DawnC]

Yes, the roof that was sold with the property in 2019.  The TurboTax software will walk you through the process of adding the roof to the Assets/Depreciation section of the rental property.   You can reach out here if you need any assistance.