How to handle improvement when selling a rental property.

[manbeing]

I installed a new roof-$6,000 and a new flooring-$4,000 for my rental property. These two improvements were marked as assets for the depreciation purpose over the years. I sold this rental house in 2018, can I add the original costs of two improvements, $6,000  and $4,000 to the cost basis of my home when calculating the capital gain?

[MinhT · Accepted solution]

Yes, you can add the original costs of these improvements to the cost basis of your rental home.

On the other hand, you'll need to recapture all depreciation allowable.

[manbeing]

Thanks for your prompt reply. After I add these two improvements to the cost basis, do I still need to allocate part of sales proceeds to these two improvements in 'Sale of Property/Depreciation' section of this rental property?

[MinhT]

No, you just report the total sale price for the home.

[manbeing]

Do you mean the sales price for these two improvement should be $0 as the original costs of these two improvements have been included in the cost basis, but other depreciated assets can still be allocated as sales proceeds? Thank you!

[MinhT]

In general, you do not need to apportion the sale price to each asset sold. You sell your home for a defined price. And taxwise, the result is the same.

[stevekayak]

@MinhT 

Still a little confused on how to close out the depreciating improvements in TT.  I have 8 depreciating items on Form 4562, besides the Structure itself; items like carpet, siding, A/C unit, etc. that are in various stages of depreciation over the last 14 years we've owned the property.  I believe I read elsewhere in this community to edit each in TT all of those still-depreciating items and 'sell' them at no gain and no expense of sale, using the closing date to specify when they were 'disposed of or stopped using them in the business'.  Same for the property itself. 

Is this the proper method to dispose of those depreciating items, and essentially lump it all into the sale of the property as a whole, rather than trying to figure out how much of the sale price went to each of those improvements? 

OR, can I ignore editing/closing out each of those improvement items in TT and just sell the Structure?

[JamesG1]

I assume that the improvements were sold and I assume that no 'sales price' was allocated upon the sale of the rental real estate.

Please do not ignore editing/closing out each of those improvement items in TT and just sell the structure.

You bring up two possibilities:

• 'Sell' them at no gain and no expense of sale, or
• Allocate a sales price to each of the improvements.

Assuming all the improvements are 1250 property with 27 1/2 year useful lives, you will see no difference under either method.  That is what I see that you have listed.

If any of the improvements are 1245 property, you may see a slight difference versus one possibility or the other.