TurboTax

File with experts
File your taxes
Experts at your fingertips

An expert helps with your taxes, or does them for you
TurboTax Expert Full Service

TurboTax Expert Assist

TurboTax Self-Employed
Prior year taxes
File myself
File myself
Do it yourself

We'll guide you step-by-step
TurboTax Do It Yourself

TurboTax Self-Employed

TurboTax Desktop
TurboTax Free

Activate your product

Prior year taxes
Business
Business
Business taxes

Get your T2 corporate return done right, your way
TurboTax Business

TurboTax Business Desktop
Tax situations
Tax situations
Tax situations

Find extra guidance for your big life moves
For investors

For 25 and younger

For self-employed

For new to Canada

For life changes
Resources
Resources
Resources

Explore tax tools, get tips, and read reviews
Personal income tax calculator

RRSP savings calculator

Learning hub

TurboTax support (FAQ)

TurboTax community
Pricing

Community

Solved

What cost basis to use when calculating an Asset's prorated sales price

Forum|Forum|3 years ago
February 16, 2023
2 replies
0 views

Hello,

In 2021, I purchased a short-term rental property and sold it in 2022. In 2022, I made $24K in improvements (new HVAC, new windows) to the house 5 months before I sold the property.

I am trying to calculate the respective gross sales price for the house and land.

I understand that I need to determine the percentage of the cost of each asset.

That said, should I be using the original cost basis of the house and land when determining the respective percentages?

Or should I use the adjusted cost basis of the house (original basis + 24K for improvements) when determining the respective percentages?

Note: The only asset is the house and the land. I have not other depreciating assets.

Thanks in advance

Not A Product Question

Best answer by ThomasM125

It would be best to use the original cost of the property for the percentage, since you are first dealing with the cost when your purchased it. The improvements came later on, so they shouldn't factor into the original cost percentages.

Also, since you didn't hold the house for long, it's not going to affect your taxes much either way, as your depreciation will be minimal so you won't have to deal much with the ordinary income factor the comes about from recapture of depreciation.

ThomasM125Answer

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Carl11_2

Employee

Let's say you purchased the property for $100,000. At that time you allocated 30% to the land. You have $70K for the structure and $30K for the land.

Next, you did $24K of property improvements to the structure. That makes $94K for the structure and $30K for the land with a total cost basis of $124K now.

Now I'm assuming you sold the property at a gain. With two or more assets listed (the property itself, and the property improvements) your selling price on each asset needs to be "at least" $1 more than your cost basis in that asset. Otherwise, depreciation will not be recaptured and taxed correctly. The sales price of all assets should add up to your total sales price. Here's an example using $200K as the sales price, but it's rough since this example doesn't actually show/account for recaptured depreciation.

Asset Cost Sales Price Sales Expenses Gain

Structure $70000 $120,000 $7000 $63,000

Land $30000 $40,000 $3000 $7,000

HVAC $19,000 $30,000 $0 $11,000

Windows $5,000 $10,000 $0 $5,000

TOTALS $124,000 $200,000 $10,000 $86,000

To that $86,000 gain you would add recaptured depreciation. But the program will tax that recaptured depreciation separately at the "ordinary" income tax rate.

If you show a gain on some assets and a loss on others, the program will incorrectly included the depreciation on those "loss" assets in the gain. That unrecaptured depreciation would then be taxed at the capital gains tax rate, instead of the ordinary tax rate.

Having owned the property a year, more or less, the depreciation isn't really going to be that much. But if your sale date is less than a year from your original purchase date you'll be taxed at the higher short term capital gains tax rate.

Michael_NCAuthor

Hi Carl,

Thank for your detailed example as it was very helpful. In reviewing it, I did have the following questions:

1) How did you compute the Sale Prices for each of the assets?

In reading your explanation, it appears that you selected Sales numbers that met the criteria where for each asset where the selling price on each asset is "at least" $1 more than the cost basis and the sales price of all assets adds up to total sales price as you explained?

So, other Sales Prices number could have been used in your example as long as the 2 criteria you explained are met?

2) For the Sale Expenses, it appears that you used the 70/30 cost basis allocation for the structure and land to calculate the respective Sales Expenses. Because the HVAC and Windows were improvements, they would have no respective sales expenses correct?

3) Should the Gain number for the Structure be $43,000?

Sales Prices - Cost - Sales Expense + $120000 - $70000 - $7000 = $43000

Possibly a test to ensure I understand your example? 😉

4) It appears that I should have defined additional asset entries for the HVAC and Windows under the Sale of Property/Depreciation section? Specifying the relevant information (e.g. Cost, Date or purchase, Date Sold, Sales Price etc) for each asset even though there will be no depreciation on them since I held them for less than 1 year.

Thanks for the education!

Carl11_2

Employee

So, other Sales Prices number could have been used in your example as long as the 2 criteria you explained are met?

Yes. It doesn't matter the amount of capital gain I show on any specific asset. In the end, the capital gains total will be the same. I could have shown a $1 gain on the structure itself with a sales price of $77,001 and a sales price of $72,999 on the HVAC. That column still totals up to $200,000 and there's no change to the amount of recaptured depreciation correctly taxed at the ordinary tax rate.

For the Sale Expenses, it appears that you used the 70/30 cost basis allocation for the structure and land to calculate the respective Sales Expenses. Because the HVAC and Windows were improvements, they would have no respective sales expenses correct?

I used the same allocation of the sales expenses between structure and land, as I used for the cost basis between structure and land. Now I very well could have allocated some of those sales expenses to the other assets. But I'd have to be sure that when the program deducts those sales expenses from the sales price of that asset, I did not end up showing a loss on that asset.

even though there will be no depreciation on them since I held them for less than 1 year.

Understand that for that to "take effect", you would have to sell the asset in the same calendar year you acquired it, or put it in service. So if you acquired and put into service the HVAC in say, Sept of 2021 and sold the property in May of 2022, you have to claim/recapture depreciation since it crosses a calendar year.

It appears that I should have defined additional asset entries for the HVAC and Windows under the Sale of Property/Depreciation section?

If the assets were acquired in 2022 and sold in 2022, no need. If I recall correctly (I may be wrong here), somewhere in the process of reporting the sale, you have an opportunity to enter "increases/decreases in basis" so you can enter the cost of those assets that qualify for exemption from depreciation, and the program (not you) will add it to the cost basis. In case I'm wrong, keep reading.

Basically, if the asset was acquired in 2022 and sold in 2022, there's no need to enter them in the assets/depreciation section. However, the program may not allow for a change in basis without doing so. If that's the case, and you did "in fact" acquire and sell the assets in the same tax year, then enter the asset in the Assets/Depreciation section with an "in service" date of the closing date of the sale. If any depreciation is taken for that one day, it'll be so minimal that it won't matter and you won't care.