Can a depreciating asset be added to cost basis upon sale of rental property?

[wjgrover56]

Hi,

I sold my rental property last year (August 2023), which was my primary residence until 2012, at which time I converted it to rental property.

I am confused by what items can be added to the cost basis. Can assets that have been depreciating (HVAC, water heater, new flooring, etc.) also be added to the cost basis? For example:

1.  Three months prior to sale, I replaced the shingle roof. Can I add this expense to cost basis?

2. I purchased (and have been depreciating) an HVAC system in 2015. Can I add its original cost to cost basis?

3. I DIY remodeled the bathroom in 2020. Can I add that cost to cost basis? I did fully deduct the expenses in that year as a repair.

And... how far back can I dig into receipts for increasing cost basis? 10 years? 20 Years? No limit?

For example: I added a retaining wall way back in 2004.  And I the replaced breaker box in 2002. Can these costs be added to cost basis? 

[DavidD66]

The cost basis you have to use is the basis that you used when you set up the property for depreciation as a rental property, plus additions and improvements that you capitalized, less the accumulated depreciation on the house and improvements.  

• You can add the cost of the roof added in the year of sale.  
• You do not add the cost of the HVAC system to the basis of the house.  You allocate a portion of the proceeds from the sale to the HVAC, as well as all other improvements you capitalized and calculate and report the gain or loss on each of these assets.
• You cannot add the cost of your DIY bathroom, or anything else that you previously deducted (expensed) on your taxes.  
• You cannot increase the cost basis for any improvements made prior to 2023, unless you file Form 3115 Application for Change in Accounting Method.     

[wjgrover56]

thanks you for the quick clear response.

if I may follow up with another question: I spent about $7K on painting, $2k on landscaping, and $9k on the new roof. and maybe another $2k on interior refresh ( new ceiling fans, bathroom faucets, etc).

can I add all this roughly 20K to the basis? its just not clear where these costs get added in...

Thanks again,

Will

[wjgrover56]

btw, all these expenses were incurred after last tenant had moved out and before the house was sold.

Will

[DavidD66]

I suggest you reduce the amount of the proceeds by those amounts as expenses incurred to prepare the house for sale.  It has the same effect on the gain as adding to the basis.