Sold a rental property in 2019 and had foundation and flooring repair expenses in 2018 and 2019. How should I report these?

[mmaragni]

I had a rental property that I bought in 2015 and sold in 2019. The property appreciated significantly in price over that time, however, in 2018 I began having an issue with the foundation which impacted the flooring. The unit was a townhouse and was tenant occupied at the time the issue began. I had over $10,000 in expenses related to fixing the foundation issue and having a contractor remove the original flooring that was destroyed and install new flooring of the same quality. I have all of the documentation related to these expenses and some others related to the foundation issue, such as reparing cracks in walls. I also had several hundred in expenses related to having my tenant's furniture moved into a storage unit while the work was completed. Should all of these expenses be deductible? If yes, how do I report these expenses now that I am reporting the sale as a gain? Thanks.

[RobertG · Accepted solution]

If you have not previously deducted or depreciated these expenses you should just add them to your basis, or claim them as expenses of the sale.

[mmaragni]

Thanks Robert, I will include them in my basis. 

[Carl]

Should all of these expenses be deductible?

No. Those expenses are not deductible "as a rental expense" per-se.  The entire cost (and I mean *every* *single* *penny* including your storage fees) are a property improvement that adds value to the property. So that entire cost gets entered in the Assets/Depreciation section and depreciated over time.

Now if the work was finished and the asset was placed *in service* after the last tenant moved out prior to the sale, let me know. If you did not have a tenant in the property between the time you completed the work and the closing date of the sale, you are not required to depreciate the asset (and you definitely do not want to either). There's a special way to handle that in TurboTax, so that the cost gets added to the cost basis of the property, without having to depreciate it. This keeps your taxable gain lower than it otherwise would be if you depreciated the asset.