Cost Basis and Capital Improvements for sale of Rental

[Carl]

See IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf starting at the end of page 13, "Change Your Accounting Method".

If you're going to add the heat pump or any other asset that you did not depreciate when you should have, then you'll have to include the 3115 with your return.

As I said, it's not simple.

[AndrewR4]

Thank you. I'll probably opt not to enter them at this point and chalk it up to missed opportunity.  I didn't realize that they needed to be entered at the time I converted to rental.  Changing 14 years of taxes does not sound like a fun endeavor. Thanks again!

[earth777]

a bit dated.. spend time reading the thread but was hoping to see a response to your final conclusion i.e. "chalk it up to missed opportunity"      

to recap, what i understand that there were improvements either before or after putting into service (rental) that were missed to be reported as an "asset" and therefore depreciated. the feedback from the community was "seek professional tax help to process for 3115" as it is a big deal...when you go to claim these improvements as a basis increase during sale and therefore lower your gains, you will be paying depreciation recapture on these assets even if never depreciated.... so i see 3 options ... would be great if someone can comment if these are possible.... let's assume the improvements are minimal e.g. 5K HVAC

Option 1)  including the 5 K in the basis but also file 3115 to change accounting to depreciate the asset properly as it was never depreciated... then pay recapture on the depreciation...  

Option 2) including the 5 K in the basis and pay recapture on the depreciation (that was never taxation)... feels like a lost opportunity but might still be financially advantageous if there is enough life left.. say asset was only 1-2 yr old.  is this allowable?  (i.e. save 2K on CPA fees to file 3115 as the HVAC has little impact)

Option 3)  this is the option OP indicated at the end.   Ignore the entire HVAC 5K improvement.  assume was never done.  do not use it to increase your basis for the sale and do not worry about depreciation.    is this allowable? 

[AmyC]

Yes, you have options:

1. Include the HVAC in the basis and pay the taxes. 

2.  Include the HVAC in the basis and pay the taxes.  File form 3115

3. Ignore the HVAC expense

4. Amend prior returns to include the HVAC expense and depreciate it since it is less than 3 years old. You will get a refund plus interest.

The IRS requires you to depreciate the house but it does not require you account for every expense.

@earth777