Rented, repaired and improved and then sold in 2023

[lynntaxes09]

My wife and I have had a rental house since 2015. In 2023, we only rented it during January. We then made major repairs (inside and outside), some of which could be partially considered as improvements. For example, the half bath/laundry room had extensive rotting from a water leak, so in the process of repairing the damage, I made the same area a full bath plus laundry room. The house was available for rent during the renovations with no takers. I did all of the work myself and decided I was done, so we sold it in June 2023 which will result in significant capital gains. What's my best approach regarding the repairs/improvements made to either increase my cost basis or increase my deductions through repair costs?

[JamesG1]

You  do not mention the amount of your expenditures.  If you paid a contractor $10,000 to replace the flooring and add fixtures, the whole cost could be addressed.  But, if you paid $2,000 in lumber, drywall and a vanity and installed it yourself, only the $2,000 is allowed.  The value-added of your labor is not considered.

The expenditures may be expensed in the current year or may be capitalized to increase your basis to be reported at the time of sale.  Or you may have a combination of both.

In TurboTax Online Premium, follow these steps:

• Down the left side of the screen, click on Federal.
• Down the left side of the screen, click on Wages & income.
• Scroll down to Rentals, Royalties, and Farm.  Click the down arrow.
• Select Start / Revisit to the right of Rental Properties and Royalties.
• At the screen Your 2023 rentals and royalties summary, select Edit.
• Scroll down to Assets.  Click Edit to the right of Improvements, furnishings and other assets.
• Click Edit to the right of Annual safe harbor elections.
• At the screen Let's figure out the best way to handle your assets, see the two options for expensing within the current year and capitalizing your expenditures.

The De Minimis Safe Harbor election lets you deduct the full cost of items worth $2,500 or less, instead of depreciating.  Some or all of the expenditures which you outlined may qualify under this election.

Or you may elect to capitalize the costs by creating an improvement that is added to Your Property Assets.  To do this select Add an asset and follow the directions on the screen.

Or you may do both.  

You may elect to expense the cost of floor replacement and plumbing under the water heater for $2,000 under the De Minimis Safe Harbor election.

And you may elect to capitalize the bathroom improvement at a cost of $10,000 and add the asset as a Land Improvement.  If so, this asset will be recorded as 'sold' when you report the June 2023 sale of the residential rental.