Capital gains: Capital improvements to rental property being sold

[Anonymous]

Capital improvements to rental property being sold.

Can a new microwave installed a few years ago count as capital improvement?

[Critter-3]

If you entered it as an asset and depreciated it then you will sell it off as an asset using a portion of the sale price.  If the asset was already fully depreciated or you expensed it in a prior year then this is not added to the cost basis of the home as a capital improvement.  

[Mike9241]

in the year it was put into service, you could either have expensed it or capitalized and depreciated it. proper tax reporting would require you to amend the return for the year it was put into service if it was 2019 or later (2019 had to be extended). otherwise, the deduction is lost.

[Hal_Al]

When you purchased the microwave, a few years ago, you made a decision to expense it or capitalize (depreciate) it. If you expensed it (deducted the cost) (and you most likely did) back then, you do not now add it back to your cost basis as an "improvement". You alredy got your deduction, back then. You don't get another one, now (by adding to your cost basis).  If you depreciated it, you do add it back, to your cost basis, as an improvement.*  But, you also have to recapture the depreciation allowed. 

*Instead of adding to your total cost basis, you could show it as the sale of a separte asset. 

[Anonymous]

Thank you all for your feedback!!

>>*Instead of adding to your total cost basis, you could show it as the sale of a separte asset. <<

Can you elaborate on this please?

[Hal_Al]

Your house building is a depreciable asset. Anything you added, like a microwave, was a separate asset and was depreciated separately from the building.  

When you sell the house (and everything in it), you have disposed of all your depreciable assets.  Usually you sell everything for one price, so you report only the total sale.  Some people, in this forum, suggest reporting the sale of each asset separately, for reporting convenience.  You would have to allocate a portion of the total sale price to the microwave.   It all comes out equal.

[Carl]

It all comes out equal.

No, it does not come out equal if you have multiple assets listed. If you do not report the sale of each asset, then the depreciation is not correctly recaptured and taxed. If sold at a gain, then you must show a gain on all assets listed. If sold at a loss, then you must show a loss on all assets listed.

Otherwise, recaptured depreciation is included in the capital gains and is incorrectly taxed at the capital gains tax rate, instead of the ordinary income tax rate.