Sale of Rental Home

Forum|Forum|3 years ago
March 27, 2023
2 replies
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Hello, I need some help on the following. Thanks! I purchased a house in 1997 as my principal residence in Texas and paid x amount of dollars and lived there until 2015. I did lots of upgrades to the house during that time. I rented this house in 2015 and purchased another house as my principal residence. I sold the rental home in 2022 for y amount of dollars which is lot more than x. I started adding data in Turbo tax under rental home section as the rental home is sold. Turbo Tax is only giving me a chance to add upgrades to the house I did between 2015 to 2022. What about the upgrades I did to the house when I was living there from 1997 to 2015? Shouldn’t that come to the tax scenario? Where can I add this data in Turbo Tax?

KrisD15

No, (and Yes).

The upgrades would not be added to the rental individually, unless they were done AFTER IT BECAME A RENTAL.

When a personal home is converted to a rental, the basis of the rental is your ("personal") basis or Fair Market Value (whichever is less).

So, if if you purchased for 150,000 and paid 50,000 for upgrades, your ("personal") basis is 200,000.

If the Fair Market Value of the real estate, when it is placed into rental service, is 200,000 or more, the basis of the rental is 200,000.

If the Fair Market Value of the real estate, when it is placed into rental service, is 199,999 or less, the basis of the rental is the lower Fair Market Value.

This should have been determined back in 2015 since you would have needed to list a basis for depreciation. (Land would also have needed a value determined, but Land is not depreciated)

After the rental is active, additional assets like appliances or a new roof, are added as separate rental assets and each has its own value and depreciation.

The sale of a rental usually produces two types of income, Capital Gain (selling for more than you paid to purchase) and Depreciation Recapture (paying back depreciation expensed over the years if you get that amount back when you sell.)

(It does not matter if you CLAIMED the depreciation or not. What you took, or could have taken, is charged back on the sale)

Sale Proceeds are allocated to each asset including the land.

So in a way, the upgrades done before the house became a rental are factored in, but only because they MIGHT HAVE increased the basis of the rental. The prior upgrades are not dealt with directly when the rental property is sold.

If they increased the basis of the rental, the gain from the sale would be that much less.

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Mike9241

the upgrades from 1997 to 2015 should have been included in your depreciable basis and depreciated once you started renting it. the IRS says you must take into account in determining your taxable gain the depreciation that would have been allowed on those upgrades once you started renting the property. I assume you didn't, so if you do nothing you're supposed to report this depreciation you didn't take as a reduction of tax basis and recapture it as section 1250 gain even though you never deducted it. you cannot just add those improvements to the tax basis in 2022 when sold unless yo want to overpay your taxes. this can be fixed but it goes so far back I would advise you to use a tax pro. your other option is for you to do form 3115 to correct the depreciation. the same rules would apply to any upgrades from 2015 through 2022 that you did not depreciate.