Residential Rental Property Improvement and Sale in the Same Year

Forum|Forum|3 years ago
January 12, 2023
1 reply
0 views

Hi,

I made material improvements to my residential rental property (spent $120K renovating it) and then I sold it for a gain in 2022. However, in my 2022 TT Home & Business, there is no option for me to enter the improvements made to the same rental property. Please can you help me with a step by step guide. Also, how do I determine the allocation of the sale price to Asset vs. Land? Can I just put all of it to the Asset and put nothing for the Land since all the improvements were made to the asset (residential rental building)?

Also, I just realized that even if I add the improvement separately as an asset under the same property then it does not show up in form 4797 line 21 (cost basis). Please let me know your thoughts on how to fix this?

Thanks,

John

TurboTax Home & Biz Windows

Best answer by DianeW777

Thank you - that was extremely helpful. A couple of final questions:

I am going to enter the 2022 capital improvements as "Repairs" in schedule E instead of "Selling Expenses" in form 4797 line 21. Please confirm that this is correct and that you agree? What difference does it make on the Taxes (if any)?

Is it a tax rule to "use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset. Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset"? My thinking was to just put the selling price of the Land equal to the cost basis so that there is no loss or gain as the Land was not depreciated and also should have no appreciation or gain/loss. Hence, all the gains and losses would be focused on the building. Is this not allowed and do I need to allocate the sales price and selling expenses to the ratio of the cost basis for the land/building that was originally entered when this asset was put in service by Tax law? I tried looking up the Tax law on this piece, but could not find anything concrete.

No is the answer to your first question. The improvements made in the year of the sale are not an expense although they are listed as such on the sale of the asset. This must be part of the sale and not the rental income or loss. The gain on the sale will apply capital gain favored treatment and the expenses used to reduce net rental income is handled differently on the tax return. Do not enter it as repairs on the rental.

Allocation of selling price/selling expenses can be done in any reasonable method such as the current basis of assets (cost less depreciation) and total cost of land to arrive at the appropriate amount for each. Likewise you could use a fair market value (FMV) of each asset to arrive at the appropriate percentage. There are various examples in IRS Publication 544. The 2022 version has not been released, however there has been little, if any, change for 2022.

Example

Critter-3

First all improvements or repairs made in the year of sale are simply entered on the schedule e as repairs. You cannot enter them as depreciable assets or take depreciation if you put them in service and take them out of service in the same tax year.

Next for the sale of the assets, you must allocate the sales price and the cost of sale to all of the assets you have listed in the depreciation worksheet. This includes the land that was not appreciated but should be listed as an asset. The program will not do this for you you will have to think back to third grade when they taught you how to do percentages and divide the the little number by the big number to get the ratio. For instance when you put the property into service, and you allocated the $100,000 of the purchase price as 80,000 to the building and $20,000 to the land ratio was 20% for the land and 80% for the building. You will use the same ratios for the sales price and cost of sale. If you have more assets listed on the depreciation worksheet then you need to total up the unadjusted cost basis of all of them and prorate the sales price and cost of sale by the same ratio of the cost basis of the asset to the total cost.

johnjames9Author

I am not sure that you are correct. I believe I can just leave the land as the same amount as when it was entered into service as no improvements were made to the land.

Separately, please can you tax experts on here chime in on whether capital improvements made in the year of sale is all directly entered as a selling expense? My understanding is that even if there is any lag (as there was in this case since the repairs were completed by September 30th and the sale occurred on December 1st and the house was just vacant at that time) then that lag from repair completion date to sale today can be depreciated (in this case it was 2 months)?