Sale of rental property - Do we include depreciation on appliances as well as the building?

[ReneeM7122]

Improvements to your home are considered capital improvements and are added to the basis when you sell. 

Here is a TurboTax article about home improvements.

@genrlconfusion

[genrlconfusion]

yes, but how exactly are they added? I see the options for 'Expenses' and 'Sale of Property/Depreciation'. I expect a portion of my expenses are considered both expenses and capital improvements, so I should figure out what portion goes under each category. 

And, if that is correct, then for capital improvements, are they just lumped together as a total and inputted under the 'edit' button under Property Assets?  Example: I click 'Edit' and indicate it was sold the property and enter the sale date, and then under the sales information (Asset sale price, expenses & Land sales price and expenses) --  I add to the total improvement totals for what I spent in 2020 (dividing between asset and land fields)?

[ThomasM125]

You would set up an asset called "Improvements 2020" or something similar. Then when you report the sale of the house, you allocate a portion of the sale to each asset based on the cost of the asset to the total cost of assets. For instance, if you set up the house as an asset and it cost $100,000 and you had improvements that cost $50,000,  you would allocate 67% of the sale amount to the house and the rest to the improvements.

[genrlconfusion]

So, in the case where I have these assets listed (after I made the CAPEX improvements the year I sold the house): Asset (house) $100k, Land $50k, Improvements 2020 $50k -- I then divide the sale price as a % to each asset (e.g., sale = $400k, so 50% or $200k for house, 25% or $100k for Land, and 25% or $100k for Improvements 2020. 

How do I treat the 'sales expenses'? Same as sales price? I divide the total sales expenses by 50%, 25%, and 25% and allocate each amount to the respective asset?

[ThomasM125]

You can deduct the sales expenses from the sale amount, then split up the net sale amount among the assets.

[ldawn513]

I am having the same problem. If I use zero for the assets (appliances and improvements) I don’t get any recapture. Also I have an issue that the rental was sold on an installment agreement. What a nightmare. I can’t get the program to calculate this sale correctly. I also have a roof purchase made right before the sale. I’d like to add it to the basis of the rental property sold but that doesn’t work since the rental property was purchased in 1980 and the roof put on in 2020. Anyone have any suggestions?

[ThomasM125]

You can enter the roof as separate asset in the year that you sold it. 

You have to make sure you have entered all of the assets that had depreciation on them. Then, allocate a portion of the sales price to each asset and your depreciation will be recaptured properly. 

[ldawn513]

Hi Thomas. Thank you for your answer. I actually already tried that way. The problem is this is an installment sale. Not a regular sale. I had to use zero for all of the assets and allocate the whole sales price to the actual rental property. The recaptured depreciation only went to the property and not the other assets because I used a zero as sales price for those. I tried allocating a larger amount to the other assets but that didn’t work either. I couldn’t get those assets (furnace, water tank, etc.) to calculate on an installment sale. And to make matters worse there wasn’t any recapture at all on those items when I did it that way for the other assets. It just created an ordinary income sale. And it threw the installment sale on the rental property out of whack. I know how the forms should look, but can’t get the program to cooperate. And it is too big of a return to do it by hand.

[DianeW777]

If the roof was completed in the year of sale you can add that cost as part of your sales expenses which would reduce the gain and would not be affected by depreciation, because it should not be affected. You should not enter an asset for depreciation when it is placed in service and removed from service (sold) in the same tax year.

As far as the appliances, or anything that was fully depreciated (not the building, land or previous capital improvements), you have two options.

1. Add them as assets at the appropriate cost and date placed in service, then TurboTax will do the math for the full amount of depreciation taken in the past.  Also TurboTax will know what depreciation must be recaptured in the year of the sale regardless of installment method. 
2. Recommended: Do not enter them as an asset if they are not already listed in the current tax year as assets.  Instead allocate the sales price and sales expenses to these items, put them in as a business sale.  The cost and total depreciation used should be the same figure which will push the sales price through as ordinary gain recapture. Do not include them in the installment sale because this gain is required to be recaptured in full in the year of the sale.
   • Other Business Situations > Sale of Business Property

Next, sell the rental property and any other capital improvements in the asset section with the allocated sales price and sales expense (include the 2020 roof in the building itself) for only those assets. Indicate they were sold on installment.

• Installment sales questions will be asked once you indicate the assets were sold in the asset section.

[ldawn513]

Thanks Diane, 

Can I still consider the sales price as “0” for the depreciated assets and allocate the entire amount of the sale just for the rental house itself? I had read on another thread that this was an option. I only have two appliances that are really old and fully depreciated. I do also have a land improvement (retaining wall) that is fully depreciated. I also gave this a sales price as zero.  

[ldawn513]

Hi Diane, I have another question. Doesn’t any recaptured depreciation get added to the basis of the rental property to calculate the capital gain correctly? And if so, how is this done? But by me allocating a sales price of zero to my appliances there won’t be any recaptured depreciation so I don’t have to worry about it. But if I didn’t use zero then how would the program do this?

Thanks

[ToddL99]

Technically, you should allocate the gross sales price to all assets in a manner that is both reasonable and consistent. Using the fair market value (FMV) would be a good approach.

For example, the fair market value (FMV) of older, fully depreciated appliances is probably "0". If you entered a greater amount (e.g. $100 for a stove), the program would apply that sum to recaptured depreciation.

"Recaptured depreciation" on the sale of individual assets translates to ordinary income on the sale of that asset. It does not get transferred to the basis of any other real estate asset.

[cangsmith12]

That answer was very helpful.  Thank you.  Does zeroing out the other assets reduces the capital gain on the building but increase the amount of depreciation needs to be recapture?

[Critter-3]

What you would like to do is immaterial ... the total sales price needs to be allocated over all the assets listed. 

[papa281]

What do you enter in "SALES EXPENSES"

Do you enter what the item or items cost at the time they were purchased even though they were claimed  as an asset for depreciation?

If you did renovations on the rental property and claimed that as an asset for depreciation, how do you enter that.  Does the cost of the renovation get added on to the cost of the rental property? ex: paid $200,00 for condo, renovation cost $80,000 so cost of rental condo would  be $280,000.  Sold if for $500,000 minus the $280,000.  Would that be correct?  If not can you let me know.

Thanks