Calculation of Cost Basis in Turbotax

9 Replies

Below is an excerpt from a Rental Property Cost basis worksheet taken from Turbotax. Basically they took the amount I paid for the property \$83k, then added in some loan costs, plus \$2k in Capital Improvements. Then I entered some information from tax records to separate out the land value. My question is this: Why is Turbotax prorating the Capital Improvements by the Land/Improvement Percentage? Isn't that all depreciable basis?  Did they do this calculation correctly?

Post acquisition improvements should not be prorated between land and building as there's a clear delineation of what those costs were for.  None of it is land.

Loan costs are not capitalized into the building.  They're an intangible asset that is amortized over the life of the loan.

@John Corretti

If you want to separate it out and have it 100% depreciable. you may just have to enter it in as a separate asset.

Yeah those Capital Improvements were all on the building. So is Turbotax taking a simplified approach here in prorating it?  As for the loan costs, it looks like certain acquisition costs can be rolled into basis and others are amortized over the life of the loan. Those are seemingly also being prorated.

Oh I think I see now....you have the choice of adding in certain acquisition costs to your basis, but then you have to pro-rate them by land/improvement. So it's better to amortize them as a loan cost over 30 years (30 year loan), so I can deduct the full amount?

You don't get to pick and choose.

Financing (loan) costs are amortized over the life of the loan.  Other acquisition costs are either expensed or capitalized into the basis of the building and land.

"Yeah those Capital Improvements were all on the building. So is Turbotax taking a simplified approach here in prorating it?"

No, TurboTax is taking the incorrect approach here in prorating improvements after acquisiton to land and building.  As @Basit Siddiqi has said, you'll probably have to add the improvements as a separate asset to get it to calc correctly.

Alternatively, may be able to expense the \$2k of capital improvements as de minimis depending on the facts and circumstances.

To follow up on picking and choosing...here is the worksheet for financing costs from Turbotax. There seem to be a lot of duplicate entries that appear on the basis worksheet, such as Recording Fees, Title Insurance, etc. Why can't I place those values here and amortize them over 30 years as part of the loan costs, instead of pro-rating them into the basis? As far as the capital improvements, would I have to amend my 2017 return to fix this? Or can I make an adjustment on the 2018 return?

You need to determine what were "loan costs" and what were "settlement/other charges".

Settlement and other charges would be incurred even if the property was purchased in cash.  These costs are not amortized over the life of the loan.

Okay weird that Turbotax would have things like Tranfer Taxes, or Recording Fees listed as an option under Refinance Costs, while those seem to be purely settlement costs. Thanks for the help!