sold rental property that was my home for 20 years before renting it out

[retired now]

I owned and lived in my old house for 20 years. During that time, $40,000 of major renovations and improvements were done on it (I kept the receipts). The purchase price of the house was about that amount back when I bought it on a contract sale and paid it off after a few years. I took a job out of state, rented the house out from 2012- 2022, and used turbo tax, which calculated depreciations each year automatically. All repairs/ improvements during the time it was rented were expensed. This year, the renter moved out in May, 2022 and I decided to sell. Some modest upgrades were done after the move out and the house sold in the fall. The capital gains are substantial, housing inflation being what it is after more than 30 years.

I understand that this year's expenditures on the property will either be expensed during the rental period or be listed as improvements prior to the sale, but I am lost as to how to account for what was put into the house  when I lived in it and it didnt factor into my taxes, aside from property tax paid on my home. How do I list the work and materials from before I even considered renting the house out?  What percentage of business use do I put in for the 4.5 months the house was rented?

I had to fill out a capital gains form for the title company for state witholding and it included  the amount for all of the improvements on the property. I see nothing like that in turbo tax. I had very little income last year, but the 10 years of depreciations on the house that turbo tax deducted from rental income reporting aren't helping me now! Any advice where I should begin (aside from hiring a tax accountant to sort the whole mess out)?  Thanks in advance!

[Carl]

Property improvements done on the house prior to converting it to rental, should have been included in the cost basis at the time you converted it to rental. If you did not do this, you have a major problem. As I understand things, it appears your state also taxes personal income. If so, then this is a double-whammy. You should stop reading now and seek local professional help yesterday, if not sooner.

Property improvements done while the property was a rental should have been entered as such in the assets/depreciation section with depreciation starting on that improvement on the date the work was completed and it was placed in service. Most property improvements do not qualify to be expensed under the Safe Harbor act, and must be capitalized and depreciated. For those property improvements that do qualify to be expensed, if you expense them, then you do not and can not add those costs to your cost basis. They were already deducted as an expense. You can deduct them again by adding to the cost basis. Again, if you did not capitalize and depreciate assets required to be treated that way, seek local professional help.

Property improvements done after the last renter moved out and before you sold it would be added to the cost basis. But since it was never placed in service as a rental asset, you don't enter it in the assets/depreciation section, meaning you can't report the sale in the SCH E section of the program. The sale would be reported instead in the Sale of Business Property section. (Since you don't qualify for the capital gains tax exclusion.)

A local professional can probably help to reduce the fines, penalties and back taxes that may be imposed at both federal and state level, so you can keep more of any gain you may have realized on the sale.