Ensuring major improvements added to cost basis of rental that was sold in 2023

[RaineB]

I've entered the major improvements I made to a rental after the last tenants moved out in order to prepare it for sale (new HVAC, new flooring). I sold it in2023. I can't see where these sums have been added to the cost basis in order to reduce my capital gain. Can you tell me where I'd see that? 

For clarification, I entered the new HVAC and flooring in the “Your Property Assets” section, which comes up after you select “Sold rental property”? (With information from other answers here, I was able to enter them so that no depreciation would be taken.) 

Thanks. 

[OpeA1]

Hello RaineB!

There are two ways to enter this into the return. The way you entered it is correct and showing up as an asset purchase which will show up as an expense on your Schedule E.

If however, you prefer this to show up as an improvement made to the property due to the sale of the property, then you should put the expenses in as an improvement. You will find this question(s) in the "Sold Rental Property" section.

Please go through the section again and look for home improvement cost (Costs or other basis) and enter the costs there. Then check your Schedule D to make sure the costs are correctly added to the sale.

I hope this is helpful!

Thank you!

[RaineB]

It turned out I had entered the two improvement items under "Home improvements."

These two items were also showing up under "Your property assets." So I deleted them there. But that deleted them from "Home improvements", too.

So reentered them under "Home improvements," and they showed up again under "Your property assets." I don't have access to my Schedule D, as far as I am aware, so can't check there. 

[marctu]

You will have to add the improvement amount to the cost, as an an expense of the sale.  Assets held less then a year should not be depreciated generally.   

• Full steps for entering the sale:
• After you click on Asset, you will be asked about the purchase: Tell Us About This Rental Asset
• In the screen Tell Us More About This Rental Asset, you will indicate the sale the date of the sale and the date you began using it for business.  Here is a screenshot:

• Next: Confirm Your Prior Depreciation
• Next: Special Handling Required?
• Next Home Sale?
• Next: Sales Information. This is where you will be asked about the sales price.  Here is a screenshot for this as well:

You would add the two "home improvements" to the sales expenses for the sale of the rental property along with all the other sales expenses, including, but not limited, to realtor's fees, transfer taxes, document prep, etc.   

I hope this was helpful @RaineB 

All the best,

Marc T.

TurboTax Live Tax Expert

27 Years of Experience Helping Clients

[RaineB]

Hi Marc: Thanks for your detailed reply. I actually had got to those screens, but I was confused about what to add as sale expenses. 

Would I enter ALL my expenses on the second screen-shot you sent?

-- commission paid + related closing costs

-- major improvements (HVAC and flooring) 

-- all other expenses related to the sale -- duct cleaning, new kitchen sink, staging costs etc 

I thought I'd need to break down the expenses somewhere before adding them as a lump sum here. Or is it OK to add them as a lump sum without further explanation? All the expenses come to a total of almost $50,000, so it seems I'd need to show the IRS my "work" on that somewhere. 

And how do I allocate the expenses between the house and the land? I could use the same ratio as I used when I established the depreciation. Or I could use the ratio that the county government used on my last assessment. 

Thank you!

[marctu]

Great follow up question.   You would enter all the costs, which would include the three categories you carefully laid out as a lump sum.  Showing your "work" is not needed, but you should keep all the paperwork associated with the sale, which would be the closing document, and all the support for the improvements, repairs, and services made and done to prepare the property for sale. 

You would want to use the ratio that you used when you started renting out the property and began depreciating it.  For that matter, a current assessment for most properties probably has the same or similar ratio.

Thanks for the follow question @RaineB 

All the best,

Marc A. Tufaro 

TurboTax Expert

27 Years of Assisting Clients 

[RaineB]

 Thank you very much! That was SO helpful. 

I have another question. From the “Your Property Assets” screen, I clicked on edit asset. The next screen asks me to review information imported from my 2022 return.

Among the items to review: "Cost" and "Land."

The cost given is the total cost of house plus land. Now I'm wondering if "Cost" should only be the house, not the total of both. I might have entered it wrong last year, so it carried over that way.

What made me wonder about that was your second screenshot. It asks there separately for the Asset Sales Price and the Land Sales Price. The screen I'm asking about just says "Cost." 

[marctu]

So let me put three screen shots here to show how to get to the Review Information screen for visibility.   

Let me assure you that you want numbers in cost, land, and prior depreciation.  That means you did it correctly.   The cost is the total cost, which includes the land.   The depreciation works on the ratio of the land to the total cost.  So if land is 20% then only 80% of the total cost is depreciated.  

 Just having cost would mean that the land was depreciated, which is not a good thing.  You would need to then file a Form 3115, to correct the fact that you depreciated the land.   Land cannot be depreciated, which results in having to file a Form 3115.  We can help clients that make this mistake in Turbo Tax Live Full Service, but you did it correctly, so there is nothing too worry about here.  

Thank you for the follow up question @RaineB 

All the best,

Marc A. Tufaro

Turbo Tax Expert

27 Years of Helping Clients

[RaineB]

Hi Marc:

Even though I'm tardy, I wanted to thank you so much for this answer, too. It was very helpful! Thank you for taking the time to provide such a complete answer.