Sale of Rental Property With Many Improvements
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Pster
New Member

Sale of Rental Property With Many Improvements

I sold a rental house in 2020.  While I was renting the property, I did several improvements, such as a kitchen remodel, bathroom remodel, new roof, landscaping, etc.  (I had 30 improvements over 9 years of rental, and each of these improvements is listed as an asset with Tubotax.)  According to your instructions, I entered the property sale in the Business Income and Expenses section.  I prorated the sales price and sales expenses for the land value and the structure value.  When Turbotax calculated the gain, it did not include any basis for all the improvements that I did on the house.  What am I doing wrong?  If I have to prorate the sales price and expenses across all the improvements as well, there will be over 30 lines entered on the Form 4797 just for the sale of one rental house.

2 Replies
ThomasM125
Employee Tax Expert

Sale of Rental Property With Many Improvements

Technically, you would have to prorate the sales price amount the assets in order to property account for the recovery of depreciation necessary to reduce your capital gain income for the portion that represents depreciation recapture. Also, you would need to do this to account for the proper basis for the calculation of the total income on sale of the property.

 

What you could do is add up the cost of assets that are similar, such as improvements, and enter a new asset for the total cost of them. You will be asked to enter the prior year depreciation for them so you will enter that amount so you will have the correct cost basis. Then, you can report the sale of that asset and enter the sales price applicable to those assets and that will result in the correct treatment on your tax return.

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Carl
Level 15

Sale of Rental Property With Many Improvements

If all of your property improvements are listed in the assets/depreciation section and have been depreciated as required by law, there's really no reason why you should not be reporting the sale in the SCH E section. That way, the program takes care of things like the depreciation recapture *for you*.

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  2020". Select it. After you select the "I sold or otherwise disposed of this property in 2020" 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 2020" 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.

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