How to claim renovations on rental immediately before selling?

[janovak1024]

My wife bought and paid off a condo before we got married. We then started renting it out in 2021. We sold it in the middle of 2023, but not before putting about $70K into renovations.

I'm a little confused since this property seems to fall into two different income sections. The sale of a home, where the cost basis should be the purchase price + 70K, and then the rental section which asks if we sold the rental.

My first question is really looking for confirmation that I fill out both sections--both the sale of the property and rental income which also asks if we sold the property.

My second question is about the renovation cost. I'm trying to figure out if it's double-dipping to add the renovation cost on to the cost basis of the sale of the home as well as list it as an improvement for the rental in 2023. Taxes on $70K is obviously a sizeable amount, so I don't just want to hand money to the IRS that we're allowed to keep, but I also don't want to run into a situation where we get screwed because the IRS says that although we renovated the rental, we didn't actually rent it after renovating, so we shouldn't deduct that from rental income.

I'd appreciate any direction you can give me.

[DianeW777 · Accepted solution]

No, you do not fill out both sections.  Below are the instructions to handle a rental that was a home during the five year period before the sale and the sale itself will only be reported in Sale of Home section.

Do not list the improvement as an asset in the rental activity.  An asset that is placed in service and removed the same year is not allowed to be used for depreciation. This will be added to the cost basis when you enter the Sale of Home. Be prepared with the number of days it was rented in total.

A portion of the gain will be taxable due to rental use days and depreciation expense.

Let's go step by step to enter your sale. 

1. In the rental asset(s) say it was 'This item was sold retired, etc...', enter the date you sold it (capture the prior and current depreciation)
2. Say 'Yes' to 'Special Handling Required'
3. Finish and then go to the next step to report your sale.
4. Scroll to Less Common Income > Select Sale of Home (revisit or update) 
5. Continue to indicate you sold your home > Edit or add your home address and ownership > Continue
6. Enter the Sales date, Selling Price and Sales Expenses > Continue
7. Enter the Date Acquired and the Cost of the Home (includes any capital improvements for the period of ownership (do not reduce for depreciation expense) > Continue
8. Continue past the 'Less than two years' screen > Yes the home was used for anything else > Enter number of days used for rental purposes
9. Continue > Select No another home was sold after _____ date > Select ownership if married  > Continue
10. Select Yes for Depreciation After May 6, 1997 for both of you if married > Continue > Enter the depreciation claimed after May 6, 1997 (same amount for AMT)
11. Continue to answer the remaining questions and you will see your 'Tax Free' and 'Taxable' gain.

[janovak1024]

Thanks! That was really specific and helpful!