Where do you enter capital improvement for sale of rental property that was converted from personal use?

[moana]

Hi All:

I hope someone can help. 

In 2014 I converted my home to a rental property that I sold in 2018.

Before I converted the property to a rental I made building improvements. Where do I enter them.

I think I enter them under Sales Information ... Under Asset Sales Expenses ... since improvements were only for building. Am I right? It seems to populate right in Form 4797 Line 21: Cost or other basis plus expense of sale for building.

Any help greatly appreciated. 

Ed

[moana]

I hope someone can help. 

In 2014 I converted my home to a rental property that I sold in 2018.

Before I converted the property to a rental I made building improvements. Where do I enter them.

I think I enter them under Sales Information ... Under Asset Sales Expenses ... since improvements were only for building. Am I right? It seems to populate right in Form 4797 Line 21: Cost or other basis plus expense of sale for building.

Any help greatly appreciated. 

Ed

[Anonymous]

you have a problem.  the improvements were made in 2014,  that was the year they should have been entered and depreciated.  it is now too late to file an amended return for 2014.     2015, 2016, 2017 would also need to be amended to reflect the additional depreciation.    however, it might be possible to file for change in accounting methods so the amended returns could be avoided.   entering these as a sales expense is wrong.  should the IRS catch this they could disallow the expense and you could end up owing additional taxes interest and penalties.    seek professional advice to help determine you best and correct option.  

[Critter]

I agree ... you have a big mess AND you are filing late with a probable balance due on which the penalties and interest is accruing as I type ... seek local professional guidance to get this corrected correctly ... if you can use the form 3115 to make the correction you will need professional help to fill it in ... it is NOT a DIY kind of form. 

[moana]

I guess what I should ask is:

What screen to report capital improvements before a rental property is ready to rent ... meaning I lived there--way before I rented it when I made improvements.

And where to report after a property is taken off rental market and improved before sale.

thanks,

Ed

[Critter]

YOU  NEED PROFESSIONAL HELP  to correct the mess you have since the improvements before you converted it to a rental should have been included in the cost basis for depreciation way back on the 2014 return ... since you did not you need professional help so you don't pay more in taxes than  you should.  The pro will help you with the rest of your questions when you talk to them.  

[Hal_Al]

Using an example:

You bought the Home in 2000 for $125,000.  The land was worth $25,000 and the house $100,000. In 2013, you remodeled the house for $10,000.  Your cost basis in the building is $110,000  (100K + 10K).  $110,000 is the amount you should have started depreciating when you converted the house to a rental in 2014.

Alternatively, you could have entered two assets, for depreciation in 2014: 1. "Building" at $100,000 and 2. "Remodel" at $10,000.

Now that you are going to sell it, you enter your cost basis as $135,000 (125K + 10K).  You then enter the depreciation recapture on the $100K that you depreciated and the $10K you should have depreciated. 

As others have said, you may want to file amended returns for 2016 and 2017 and actually claim the depreciation missed. It is too late (after 4-15-19) to amend 2014 and 2015. 

Money spent, after the property is taken out of rental service,  and improved before sale, is added to the cost basis.  Continuing the example, if you spent $5000 on fix up costs, your cost basis is  $140,000 (125K + 10K + 5K).

Also as others have said, you want to get your tax return done professionally. 

[Hal_Al]

You post indicates that your are using TurboTax Business, rather than one of the personal tax versions..   The sale of a converted rental house, like the rental income and expenses from 2014-2018, usually goes on your personal return, not a business return. 

[Critter]

If you did not add the improvements to the cost basis back in 2014 AND you have not taken the depreciation on that amount at all then you cannot amend the return to make the correction ... you must seek professional assistance to file a form 3115 ... do NOT try this yourself.

[Carl]

For rental property, all capital improvements are entered in the Assets/Depreciation section. It does not matter if the improvement was done before you converted it to rental, or after. THat's where "ALL" capital improvments are entered.

But in your case, it looks like you did not enter your capital improvements "at all" when you converted the property to a rental back in 2014. If so, you have a *MAJOR* mess of which the back taxes, fines, penalties and late fees are going to make the cost of professional help seem like a pittance in comparison. So seek professional help yesterday, if not sooner. A "true" professional can help you to reduce all the files and penalties you "WILL" pay if you try this on your own. Then, if your state also taxes personal income that will double all the fines, penalties and back taxes because after you pay the IRS for your mistakes, you'll also have to pay your state. Get professional help yesterday, if not sooner.