Cost basis for rental property

Forum|Forum|1 year ago
February 26, 2025
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Last year was first time i started renting out a single family house (bought Jan, started rent in April). I am trying to understand the cost basis when filling this section out in turbotax. In turbotax it says that home improvements can increase my cost basis and give a greater tax benefit so does that mean having HIGHER cost basis will lead to better tax refunds from IRS ? I tried to read about cost basis but still dont understand

Ask the Experts - Vacation - Feb 2025

DawnC

Employee

When you sell the property, your gain will be the amount you received less your cost basis (the amount you paid for it). The cost of any improvement you do is added to the basis, so your gain will be lower.

Cost basis is the original purchase cost of an asset (such as stocks, bonds, or property), plus any adjustments that result from transactions over the period you own the asset. Examples of adjustments would be an increase in valuation due to a property improvement or a decrease in valuation due to unreimbursed storm damage to the property.

When you sell the asset, your cost basis gets subtracted from the money you collect from the sale. Instead of paying tax on the full amount, you only get taxed on the profit (the selling price minus the cost basis).

How do I handle capital improvements and depreciation for my rental?

Can I deduct home improvements on my tax return?

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ngdonna2020Author

I am not selling it yet so What about when im using cost basis for my depreciation expense to offset my rental income on the property that I earn from renting it out last year? From my understanding, adding home improvements will increase my cost basis and give me HIGHER tax refunds ? Is this right?

DavidD66

No necessarily. If your rental property is generating taxable income, then additional depreciation expense will reduce, or possibly eliminate your taxable rental income, which will reduce your tax. Rental losses are passive losses however. If you have a loss from your rental property, you can only use that loss to offset passive income, unless you qualify for the exception to that rule.

There are two exceptions to the passive loss ("PAL") rules:

If you (or your spouse) are a real estate professional, or
Your Modified Adjusted Gross income (MAGI) is below the limit that allows you to deduct up to $25,000 annually of rental loss.

If your modified adjusted gross income is $100,000 or less, you may deduct up to $25,000 of rental real estate losses per year if you actively participate in the rental activity. Active participation means you are involved in meaningful management decisions for the rental property and your ownership interest in the property is more than 10%. The allowance is phased out for taxpayers when their MAGI exceeds $100,000 and eliminated entirely when if it exceeds $150,000.

Any losses you can't deduct are carried forward until you have passive income to offset, or you sell the property, at which time you can take all prior losses to offset any gain on the sale.

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