Sale of Rental Property and disposition of improvements

[RAH727]

In 2015 I bought a rental house for 215,000.  I sold the house this year for 315,000.  Over the course of 6 years, I made several improvements:  Significant expenses like a Roof, New Driveway, New French Doors, Wood Floors, other less expensive items.  My questions:

1). TT requires you to split the sale into asset and land.  The land appraisal alone for 2021 shows $160,000!  Back in 2015 it was much lower, $88,000. How do I reconcile that with the overall sales price?  Should I assign something other than $160,000 to the land portion?  Assigning $155,000 ($315k - $160K) to my asset doesn't seem right.

2).  How would you classify a totally new driveway when added as an improvement?  "J5 Qualified improvement" or something else? How would you classify a new French door that replaced an old sliding door?  What happens if I classified it incorrectly when I initially added it?

3). Going back to my sale price of $315,000 ... how do I dispose of the improvement items like I mentioned above?  TT asks about selling each of my improvements.  I don't know what my roof, driveway, French doors, etc represent in the $315,000 figure.   I know what I originally paid.  Does the total of these improvements affect my original purchase entry of $215,000?  I'm doing something wrong because I'm getting error messages during the smart review.  What step by step process should I use for each improvement so I can satisfactorily dispose of these improvements in the sale/depreciation section?   

[Critter-3]

You use the same ratios for the sales price and cost of sale that you used when you put the assets into service ... it is a simple math problem using ratios ... don't dive deeper into the pool than that.  If you have NOT entered and depreciated the assets over the years it was a rental then RUN to a local tax pro to get this massive error corrected. 

A simple example of ratios ...  if you have more assets than the example then you will have more lines.  Remember if you divide a big number into a littler number you get a % ...  thus 5000/100,000 = 5%

       original  cost basis          ratios                  Sales price             cost of sale 

home    80000                   80%                          160,000               8,000

land       15000                   15%                           30,000                 1,500

Imp        5000                        5%                           10,000                   500 

totals     100,000                100%                        200,000               10,000

All you need to enter into the program is the % of sales price & % of cost of sale for each asset ... once  you have these figures the entry in the asset section is simple.

[RAH727]

First ... thank you!

I used actual costs of purchase & sale from the Title companies Settlement Statement.

I did not make any improvements to the house before starting the rental.  So I have no improvement ratio.

Over the course of 6 years, several improvements were made -- and entered -- as property improvements.  I may or may not not have categorized them correctly(i.e. wood floor vs roof vs driveway vs drainage -- which was one of my questions), but they were entered nonetheless for some type of depreciation.

So I sold the house for $315,000.  Besides disposing of the rental property itself for $315,000, TT then asks me if I sold the roof, the driveway, the wood floors, the new doors, etc ... obviously I did, as those went with the house.   

Just to be clear...

When it comes to entering sale of the property, please confirm that you are saying to use the same ratio as when I entered it into service.  If I had established a 70/30 split when I put the rental into service, then my sales price would be entered as $220,500 for the asset.  My land sales price would be entered as $94,500.  Correct?

That adds up to my sales price of $315,000 .... but I still have to deal with all the listed improvements.

Now , how do I treat the sale of each improvement?  Say the new front door/assembly cost me $5,000 when I originally listed it as an improvement.  What do I put in the sale price for all these items?

[Critter-3]

When it comes to entering sale of the property, please confirm that you are saying to use the same ratio as when I entered it into service.  If I had established a 70/30 split when I put the rental into service, then my sales price would be entered as $220,500 for the asset.  My land sales price would be entered as $94,500.  Correct?  Not really you have to take into consideration all of the assets combined... refer to my example.

That adds up to my sales price of $315,000 .... but I still have to deal with all the listed improvements.  Yes you do ... all assets must be considered. 

Now , how do I treat the sale of each improvement?  Say the new front door/assembly cost me $5,000 when I originally listed it as an improvement.  What do I put in the sale price for all these items?  Again refer to my simple example ... total up all the assets and do the calculations for the ratios ... then use those % against the closing costs and sales price.   Set up a spreadsheet just like I posted which is the same thing I was taught and have used for 30 years.   Stop thinking about this too much and just follow the example.  

[RAH727]

I thank you for sharing your time this morning and many years experience with me!

For reference.  Total original purchase:  $215,000.  Assigned the land at $60,000 ... so the asset was $155,000.   

The total of my improvements, over the course of 6 years, adds up to approx $50,000 ...  and have been depreciated accordingly by TT. 

If I understand you correctly, the spreadsheet would look something like the following:

Original Cost Basis.            Ratio.          Sales Price.        Cost of Sale

Home 155,000                    58%              182,700.           ?

Land      60,000.                   23%.               72,450.          ?

Imp.        50,000.                  19%.               59,850.           ?         

Totals  265,000                                          315,000.          ?

Cost to buy: $540 (Settlement Statement)

Total sales price was $315,000.

Cost to sell:  $1766 (Settlement Statement)

I'm trying to convey my confusion as best I can.   Sorry if I'm being dense on this ... first rental property sale.  Thanks again!

[RAH727]

One more question on your spreadsheet ...

In your example, you used $5000 of Improvements to help figure a ratio at the time of purchase.  I didn't do any improvements to the house before renting it out ... I only did improvements along the way.  

The total of my improvements over the 6 years of ownership adds up to $33,260.  

I don't think I can use that figure in the same way you did on your spreadsheet.  The only ratio that I can come up with is the house/land ratio which is 72/28.

[RobertB4444]

@RAH727  Your spreadsheet is fine.  It's just like it should be.  Are you having trouble working your way through the TurboTax guide?  In that case it is a good idea to have someone go over the return with you.  I recommend getting live expert help.

Here is a link to finding a TurboTax expert.

However, that requires upgrading your product which may be an expense you don't want.  In that case you can call an expert and ask questions over the phone.

Here is a link to the TurboTax Phone Number.

The improvements on @Critter-3's spreadsheet were depreciated, that is why he included them there.  If your improvements were expensed in years past you would not include them.

[RAH727]

Thank you to everyone for your help!

[Charlie Schmidt]

Hi,  

Hoping someone might be able to help with an issue we are having that is similar to this post.  We also sold a rental property in 2021 and are allocating the sales price across the home as the original asset and the improvements recorded as assets over the years.  The improvements made to the property within one year of the sale date are showing as Ordinary Gains on Form 4797 and thus don't appear to be adding to the cost basis of the property overall.  The property was rented up to and including the sale date, so we listed the date the improvement was finished as the date each improvement/asset was placed in service.  Everything I have read indicates these improvements should add to the basis, so wondering if we are doing something wrong in entering these.  Any thoughts?  Thanks, 

[PattiF]

In the year of the sale, improvements do NOT get depreciated at all ... the program will not even allow it.   The cost is added to the Sch E as repairs even if the amount is large.  

@Charlie Schmidt