First, deal with figuring the cost basis of the land for each parcel. Then you'll deal with the cost basis of the structure on the parcel of land you sold. The land first.
Look at your property tax bill. It will, one way or another, show the assessed tax value of the land, and the assessed tax value of the structure. Most tax bills I see will give a "totaL" assesed value of the entire property, and then a separate assessed value of the structure on that property. (The structure on the property is sometimes referred to on the tax bill as "improvment value") So for example:
Total Value - $120,000
Improvements - $100,000
The $20K difference is the assessed tax value of the land. Simple math indicates that the assessed value of the land is 16.67% of the total assessed value.
So if you paid $150,000 total for the property, 16.67% of that is $25,005. So your cost basis in the land is $25,005. If the land was divided exactly in half, then the vacant land has a cost basis of $12,502.50. The cost basis (total) of the land with the house on it is $137,497.50. To that amount, you will add the cost of your property improvements. But make sure you understand exactly what a "property improvment" is, as opposed to the cost of repairs, maintenance, and other expenses. Definitions are provided below.
Property Improvement.
Property improvements are expenses you incur that add value to the property. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the property and it's assets in the usable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent or sale are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent or sale are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
