Schedule E for sale of a rental property and capital gains

[Tekmann]

Our house became a rental property in 2012 and remained a rental until May 2020.  We remodeled the property and sold it July 2020.

Adjusted cost basis is the price paid plus certain closing costs and cost of permanent improvements.

Questions:

1. Is price paid what we owed in 2012 when the primary residence was turned into a rental?

2. Commission, legal fees and taxes are added to sales price at closing.  What closing costs do I include in purchase price?  Would it be paying buyers closing costs and home warranty?

3.  When listing expenses, do I also include property improvement?  For example:  We replaced the roof, remodeled the garage, new flooring to the entire house, painted entire house, added new cabinets in kitchen and bath and upgraded electrical, plumbing and insulation of the attic and crawl space. 

       All of the above are permanent and added value to the house.  Do I include the expense under repairs in the Income section AND in the improvement section to calculate depreciation?

4.  My situation is this, we owed $90,000 and the house sold for $132,000.  It looks like we made $42,000 on the sale of the house but we didn't.  We netted $9,000 profit at closing and spent over $50,000 on improvements.  I don't know how to enter this.

[ColeenD3]

Q1) When you converted to rental, your basis for depreciation as the lower of adjusted basis (purchase price plus improvements up to that point) or the Fair Market Value at the time of conversion. If you are asked for the purchase price, it is its original cost. If you are asked for basis, it is cost plus improvements.

Q2)

Settlement costs. Your basis includes the settlement fees and closing costs for buying property. You cannot include in your basis the fees and costs for getting a loan on property. A fee for buying property is a cost that must be paid even if you bought the property for cash. The following items are some of the settlement fees or closing costs you can include in the basis of your property.

Abstract fees (abstract of title fees).

Charges for installing utility services.

Legal fees (including title search and preparation of the sales contract and deed).

Recording fees.

Surveys.

Transfer taxes.

Owner's title insurance.

Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

3) These are improvements that are added to the basis. They are not repairs so they are not expensed.

4)What agreements you have with lenders is irrelevant. You are doing this computation:

• Purchase price
• + Improvements
• - Depreciation 
• + Sales Expenses gives adjusted basis

Sales price minus adjusted basis gives you a gain or loss. Page 2 of Form 4797 shows this on page 2 ,lines 20-24.

Form 4797