Your adjusted basis is the purchase cost less depreciation.
When you did the 1031, the gain was deferred, but if there was depreciation recapture, you would have needed to claim that in the year of the 1031.
Now, the rental would be that previous adjusted basis (cost less deferred gain) plus the improvement (5,000) less the depreciation from when it was previously a rental. You say that was 25,000.
When you converted it to personal use in 2008 or 2009, you should have noted the depreciation for the three rental years.
The IRS makes a point of the fact that it doesn't matter if you took depreciation or not, you need to account for it.
If the basis was around 25,000, you would have claimed around 2,727 in depreciation over three years.
When you again enter it as a new rental, you will adjust the basis for the improvement as well as the depreciation.
25,000 + 5,000 - 2,727 = 27,273
It will be tricky when you do sell it since the prior depreciation is hidden in the reduced basis.
You will need to adjust to claim the prior depreciation.
If the 30,000 is reduced by 2,727, you'll enter the basis as 27,273
Depreciation will be around 992 per year.
Say you rent it ten years, you'll claim 9,920 in depreciation.
You sell it after ten years for 31,000.
The new adjusted basis will seem to be 27,273, - 9,920 = 17,353
You will SEEM to have a 3,727 capital gain and 9,920 Depreciation Recapture
IN REALITY you will have a 1,000 Capital gain and 12,647 Depreciation Recapture to account for the 2,727 PRIOR PRIOR depreciation.
This will matter since Depreciation Recapture is taxed as ordinary income.
When you do sell, I suggest you enter as a conversion to personal use in the Rental Section first in the program.
This will take it out of service with no tax reported.
Next, enter it as a sale of Business Property and adjust the basis and depreciation.
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