Sale of 100% rental property, cost basis, improvements, depreciation

[Art67]

I need help figuring out the math associated with the sale of rental property.

I bought a condo apartment in 2003 for $82k - this shows up as my purchase price in TT.

Throughout the history of my property, I purchased appliances for a total sum of $6k. All of them have been fully depreciated.

After my last tenant moved out in 2021, I made a major renovation totaling $27K.

TT shows the total amount of depreciation is $55k.

Is my adjusted cost basis = $82k + $6k + $27k - $55k = $60k?

If so, where exactly should I enter the cost of improvements in TT - both $6k and $27k?

I sold the apartment in 2021 for $200k. I had $12k in sales expenses. 

Is my total gain = $200k - $12k - $60k = $128k?

Thanks in advance!

[ColeenD3]

Yes, your basis is more or less as you describe, but you have to isolate the appliances and give each a sales price. You then have to apportion some of the sales price to the assets.

[Carl]

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[Art67]

Do I need to consider fully depreciated assets (e.g. appliances)? It seems TT doesn't continue to report fully depreciated assets (i.e. their cost and accumulated depreciation) on the assets summary page.

Say I bought a property 10 years ago for 100k and a year later I bought a fridge for $1k. The fridge is depreciated for over 5 years and the property for over 27.5 years. When I sell 10 years later I will only have my rental property listed on the TT assets summary page, and the fridge will not show up. Does it mean I should disregard its cost and its depreciation when reporting the sale to IRS?

[Carl]

Do I need to consider fully depreciated assets (e.g. appliances)?

Absolutely. Depreciation is not a permanent deduction. In the tax year of sale, "all" depreciation taken on "all" assets is recaptured and taxed.

and the fridge will not show up.

the only way the fridge would not show up, would be if "you" incorrectly deleted it at some point. As stated, all depreciation has to be accounted for at some point.  Now there are some things that could happen that would be a valid reason for deleting a fully depreciated asset.

For example, if after six years, the fully depreciated fridge broke beyond economical repair and you actually had to throw it out and buy a new one, then you would have reported it as "lost, stolen, destroyed, etc." and selected the "Special Handling required?" option. That would have been reported in the 6th year in this example. Then in the 7th year the asset would be removed from the list since it was "accounted for" the prior year as a disposed of asset that was not sold. Since the fridge was already fully depreciated and disposed of because it was broken, there would have been no depreciation recapture and no further deduction allowed for that fridge.

Then the new fridge would have been entered as an asset if purchased and placed in service prior to 2018, and you "would" see that listed in the assets/depreciation section.

Now I don't know the intricacies of how things work at the IRS. But if I were reviewing your return and saw a fully depreciated refrigerator just "disappear" one year with no indication of it's disposition, that would probably get my attention. Keep in mind the chances of that would be low, considering the fact the IRS has to process over 500,000,000 returns within a 90-120 day period "every" "single" "year".

[eelsource]

This is not correct. "Since most depreciable real property is depreciated under the straight-line method, true section 1250 recapture generally does not apply. "   I sold a property in 2020. When I used TT to do the tax, it didn't recapture the little improvements I made over the years.  The gain is calculated as "sales price – cost base + depreciation of the rental property".