Question

Adding renovation costs prior to rental sale

Forum|Forum|6 years ago
April 16, 2020
2 replies
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I converted a residence into a rental in 2009 and sold the property in 2019. My renter vacated the property in June, the renovation occurred in July and the property sold in September. I'm trying to enter the cost of the renovation to increase the cost basis (and thereby decrease my capital gain) but cannot find a screen to make that entry. I'm going to the asset, selecting sale, it ask for the cost & expense to the structure and land but place to enter the cost of the renovation. I've seen several posts referring to doing this but none of them say exactly how to make the entry. Thanks in advance!

RobertG

You can add it to the cost of the structure, or add it as a selling expense.

Wherever you add it, it has the same effect of increasing your basis and reducing your gain on the sale.

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Carl11_2

Employee

Enter your property improvements in the Assets/Depreciation section. If it won't accept zero percent business use, then enter 1% business use and make the in service date the closing date of the sale. That way it will add to your cost basis and you'll take no (or minimal) depreciation.

After you've entered all those property improvements, work through the assets/depreicaiton section a 2nd time to correctly report the sale.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in 2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets. You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.