Rental Property Improvements Made Before Sale of Rental Property

[Ann47]

Hi.  I made about $13,000 of improvements to my  rental property right before I sold it in 2023.  I had stopped renting the property out in April, the improvements were completed in June, and I sold it in July.  I added the improvement as a separate line item calling it improvements to residential real estate.  I figured out how to ensure no depreciation was claimed for the improvements since I did them after the property was no longer available for rent.  My only issue s that TurboTax software is showing this improvement as a short-term capital gain and thus considered ordinary income.  My understanding is that capital improvements are part of the property and would be included as a long-term capital cost in the basis of the property since I owned the property for more than 1 year.  If I allocate the sales price and expenses based on percentage between the land, condo building itself, and the improvement, I am paying ordinary tax rate on a net gain of $1,200 for the improvement.  If I could include the improvement in the cost basis of the condo itself (as I would do if it was my personal home). I would only be subject to capital gains tax rate.  Do not know how to fix this in Turbotax software.  Please help.

[DavidD66]

You are correct.  It is an increase to the basis of the property and should be treated as a long term gain.  Adjust the date the $13,000 of improvements were placed in service so that the holding period is greater than one year and is treated as a long term gain.  

[Ann47]

Thank you for the reply.  If I adjust the date the property was placed in service, it is going to try to take depreciation even though I should not take depreciation on it.  Do I just put 1% business use (the minimum that Turbotax will allow) and explain in a note to IRS? Or?  The software really makes this more complicated than it should be. 

[Ann47]

Thank you!  With your advice, I was able to correctly put the improvement as long term capital gain.  I just worded the improvement as "Improvements Completed 6/6/2023 Prior To Sale" so hopefully IRS understands that I did not actually do improvements in 2022.  Do not want to trigger an audit because IRS thinks any improvements completed in 2022 should have been depreciated. Wish Turbotax would allow letters of explanation in their program.

[DavidD66]

You're welcome.  What you did does not need an explanation. It will not "trigger an audit".  If there was a way to attach a letter of explanation I would recommend you not do so.  An explanation would require a person look at your return, as opposed to it being processed electronically and never reviewed by a person.  

[Ann47]

Good point.  Thank you!