Sale of rental property

[peterstribe]

I converted my main home in 2015 to a rental property and I sold the property in 2021.   Looking at my cost basis, I forgot to adjust for some improvements (Granite Counter Tops, new furnace and tile floors) from when I lived in the house and I refinanced the home during this time.  Should I have adusted my cost basis for these items and can I go back and adjust my cost basis now?  Also, how do I do it in Turbo Tax Home & Business.

[ColeenD3]

No, you can't add these now. They should have been added and depreciated when they were placed in service.

Please see this answer from  @HelenC12

No, you can't add the improvements to your cost basis. You'll need to enter the improvements, as assets, and complete Form 3115 - Application for change in Accounting Method to enter the depreciation not taken. Catch-up depreciation is an adjustment to correct improper depreciation. Claiming catch-up depreciation is a change in the accounting method. You’re changing from a depreciation method that’s not allowed to one that’s allowed.

[peterstribe]

These are items/costs before the property was used as rental property.  I remember being confuse on whether you could classify these items as improvements when it was my main home.  Should these have added to my cost basis?

[MayaD]

Yes, you should have added the cost of improvements to your cost basis since it was done before the property was available for rent. 

Also, the cost basis should have been adjusted to calculate the depreciation when you converted the property. 

[peterstribe]

If I understand you, I can not go back and fix it, correct?

[rmilling3165 · Accepted solution]

As I understand when a residence is converted from personal use to business use (ie. income producing) the basis for depreciation is the lesser of the FMV of the home (land and improvements) or the adjusted basis (original cost plus cost of improvements less any depreciation previously taken).  Its sounds like you forgot to add the cost of improvements when the home was your personal residence to your cost basis. This doesnt sound like a change in accounting method. I would assume the proper way to handle this would be to file amended returns for each of the prior years that were incorrect. The items would be added to the cost basis of the house and depreciated over 27.5 years. So in the previous years you would get an extra depreciation deduction but now your cost basis is lower. You are also adding to the potential 1250 recapture rules that tax previous depreciation at higher rates (right now I believe 25 percent). How much money are we taking about?? You could file amended returns or you could take a chance and just run everything through the current year. Something similar happened to a relative of mine and they turned to me for help. I just ran everything through the current year along with a statement of explanation (instead of filing ten plus years of amended returns)  and the IRS replied with a very nice letter saying they accepted the return. Maybe it technically wasnt the correct way to do things but it got my relative to where they should have ended up and it sure saved a lot of time. 

[peterstribe]

Thank you