Cost Basis and Depreciation

[joehartline]

I remodeled the rental house last year and then sold it in the same year.  I put all the remodeling costs under one depreciation category. Should I change the cost basis or is that handled when I put it in depreciation?

[M-MTax]

Add the improvement costs to your basis.....DON'T depreciate them.....you don't take a depreciation deduction for assets placed in service and disposed of in the same year.

[Carl]

Under no circumstances and with no exceptions will you ever change the cost basis of an asset already listed in the assets/depreciation section. Doing so will totally mess up things for the depreciation on those assets.

I am assuming the last renter moved out of the property in 2020, then you did the remodel and sold the property all in 2020.  I am also assuming that you do not qualify for the "lived in 2 of last 5 years" capital gains tax exception. Here's what I recommend you do to keep things simple and get the best tax advantage.

- First, do not enter any assets in the assets/depreciation section for those property improvements you did after the last renter moved out.

- Work through the SCH E section of the program and convert the property and all other listed assets if any, to personal use, with a conversion date of one day after the last renter moved out. This will stop depreciation on the property and all other assets listed in the assets/depreciation section on that conversion date.  WHile working through each individual asset to convert them to personal use, take note of the prior year's depreciation and current year depreciation on each individual asset. Then add up those depreciation amounts to get the total amount of depreciation taken on the rental property and all of it's assets.

- Report this sale in the "Sale of Business Property" section of the program. When you get to the screen asking for your acquisition and sales information, it'a rather simple. Just enter the following information that it asks you for.

Description - It's best you enter the same description on the property that is already used for the property on the SCH E.

Date Acquired - The date you originally purchased, closed on, or acquired ownership of the property.

Date Sold - The date you closed on the sale of this property.

Cost of Property - Here you will enter the original purchase price you paid for the property, plus the cost of your remodel/property improvements, plus any sales expenses you paid when you sold the property. (this includes realtor commissions.)

Depreciation Taken on this Property - Here you will enter the total of all depreciation you have taken on the property. (You got this earlier as you were converting the property and all of it's assets to personal use.)

Then continue, and on the next screen select "Real Estate that I took depreciation on", and continue again.

You should be able to finish this section through on your own now.

[joehartline]

So what do I do with expenses like house insurance that came due after the renter moved out but during the time I was remodeling? And the annual termite fee? And the Legal Shield monthly fee that I kept paying as I contemplated suing the renter? If I convert the house to personal use one day after they moved out, do I even have a place to count those expenses? Does it make more sense to call it a rental for a few months during repairs and capture those expenses named above?

[Carl]

Does it make more sense to call it a rental for a few months during repairs and capture those expenses named above?

If you stopped actively trying to rent the property after the last renter moved out, then you can't call it a rental for the portion of time after that last renter moved out. Now if you did the remodel *and* tried to rent it after the remodel, then it's no problem. For example, if it was advertised as "for sale or rent", then you're fine.

Otherwise, the insurance is pro-rated for the period of time it was a rental. You should also request and get  a refund or credit from the insurance company if the property was sold before the end of the insurance term that you paid for.

The other fees since they came due after the date of conversion, do not cover any period of time while the property was classified as a rental. Therefore, they're just flat out not deductible on SCH E.

[M-MTax]

Does it make more sense to call it a rental for a few months during repairs and capture those expenses named above?

Yes it does make sense to do that.