Capital Improvements year of sale of rental property

[PremierTaxTravel]

To report capital improvements that were made the same year of sale of the rental property.  Is it proper to enter them as a separate asset and report them as sold for $0?  This would be a short term loss to offset the long term gain on the sale.  Should they be a selling expense? Or simply an adjustment to basis? 

[dkh]

If the improvements were done so the property could be sold, I would enter as a selling expense.

If improvements were done and property was still rented prior to being sold, I would enter a separate asset and allocate a portion of sale price.

[dascpa]

I agree with the above except - if I installed a heat pump for example for $10,000 before the sale and then sell the house with a gain, did the heat pump REALLY appreciate to $11,000 at time of sale.  In the end it may or may not matter mathematically but appreciation apportioned across the board may not be logical in all circumstances.

[sjrcpa · Accepted solution]

I'd make it an adjustment to basis.

Others disagree with me, but I report the whole shebang as one sale. In my view, they did not separately sell land, building, improvement and appliances.

[IRonMaN]

Yup, me too.  I have never seen a purchase agreement breakout the sale for 48 door knobs $22, furnace $666, roof $4999, etc, etc.  They bought the whole shooting match for one price so I am not wasting my time breaking it out into 120 portions.

[dkh]

My answer was based on the OP suggesting to enter capital improvements as an asset then reporting sold as $0         

I'd hope no one would enter each improvement as an asset instead of one grand total.   Yikes!

[TaxGuyBill]

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@IRonMaN wrote:

Yup, me too.  I have never seen a purchase agreement breakout the sale for 48 door knobs $22, furnace $666, roof $4999, etc, etc.  They bought the whole shooting match for one price so I am not wasting my time breaking it out into 120 portions.

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How do you enter it in ProSeries?  Do you enter it directly on the 4797?

[IRonMaN]

I delete the existing assets and accumulated depreciation and create a new asset with those totals.

[dkh]

I use the oldest asset to enter the total of all assets.  I use the Supporting Statement option for the Cost and Accumulated Depreciation so I can enter in each asset amount.  Then I print out to document my calculations.

[dascpa]

All of your shortcuts are great, but you really need to separate Section 1245 and Section 1250 assets in the return.

[IRonMaN]

So a half baked assignment of selling price to those assets creates a more accurate result?

[sjrcpa]

Since there is no separate sale of the 1245 assets, my view is they are "sold" for tax book value. No gain/loss so no separation needed.

[PremierTaxTravel]

Thanks everyone. I plan to adjust the basis. 

[gjgcary]

I AGREE, BUT IF I ALLOCATE ZERO OF SALE TO IMPROVEMENTS MADE THIS YEAR, THE LOSS APPEARS IN THE LESS THAN A YEAR SECTION OF 4797 AND CARRIES TO ORDINARY INCOME SECTION OF 1040 AND TAXES ARE MUCH LESS. WHAT AM I DOING WRONG? THE 4797 DOES NOT SEEM TO DIRECT ME TO OFFSET GAIN OF THE MAIN RENTAL ASSET. 

[sjrcpa]

They didn't sell improvements for zero. They were sold as part of the entire property.

[gjgcary]

I agree, I must be missing something. Are there rules for allocating sales. I'm just saying I need to allocate an equal amount of the sale to force a zero gain/loss in the under one year section of the 4797. However, if I allocate a sale amount less than cost, I generate a loss against ordinary income. Shouldn't the program tell me this is wrong, given the commonsense issue that the addition was part of the whole sale?

[IRonMaN]

How do you know that those items weren't sold for a gain?

[gjgcary]

IF I ALLOCATED MORE OF THE SALE TO THE IMPROVEMENT THAN THE COST, THE CLIENT'S TAX WOULD INCREASE, SO I WOULDN'T. IF I ALOCATE ZERO, TAXES WOULD DECREASE. IF IT ISN'T AGAINST THE TAX CODE, WHY NOT CREATE THE LOSS TO DECREASE THE ORDINARY PORTION OF CLIEN'TS INCOME? I AM TRYING TO HAVE SOMEONE TELL ME WHY IT WOULD BE AGAINST THE TAX CODE, TO CLAIM THAT THIS COMPONENT OF THE SALE, CAN NOT BE TREATED AS A SHORT-TERM LOSS. I AM NOT TRYING TO WIN AN ARGUMENT. 

[IRonMaN]

If you are going to type in all caps, it does appear that you are trying to win an argument.

Did the sales agreement actually break out the sales price to specific portions of the building?  If not, how would you know what portions were actually gains and losses and long term and short term?

[gjgcary]

I'm sorry about the caps. They are offensive, if intended. Unless I hear that I found some loophole that savvy tax preparers use to lower taxes on selling rentals, I am allocating the sale amount equal to the improvement addition. There was no allocation in the sales agreement. It seems doing otherwise would come back to haunt me. Thanks for your indulgence.