Level 2

Question

Entering depreciable improvements to a rental that were not depreciated to calculate gain on sale of rental property

Forum|Forum|5 months ago
January 8, 2026
5 replies
9 views

Client made several improvements over the past 35 years to their rental property. $63k in improvements were never depreciated or expensed. Now they are selling the rental property. How do I record the undepreciated improvements in order to 1) increase taxpayer's basis in the property, and 2) ensure depreciation allowed or allowable is calculated in ProSeries to determine the depreciation recapture amount?

ProSeries Professional

BobKamman

Level 15

Have you been preparing their returns for the last 35 years?

(No, of course not, you would have been doing it correctly.)

How do the taxpayers know these were never expensed? They have enough receipts and records now to tell you the cost, but they didn't tell their preparer back then?

Maybe they have gone from ignorance to informed. Good luck.

IRonMaN

Level 15

Bob - your opening sentence was my first thought ——— which is a little scary. The next thing you know I’ll be telling stories of my old days with the IRS, even though I never worked there. 😳

Slava Ukraini!

ljr

Level 9

so, client thinks they have a $63K expense to lower their gain and these expenses were only remembered because they are selling. I would check any depreciation schedules they might have from prior years. You might be surprised and see them on there already.

Can they tell you the year of the improvement - it might already be "fully depreciated" or close to it. You would try to take the expense but have depreciation recapture (and of course you would complete form 3115 change of accounting method to request/tell IRS about the depreciation.) so you would net back to zero and have the same capital gain. Unless it was done in the last year or two - tell them it makes no change to the net sale.

IRonMaN

Level 15

"I would check any depreciation schedules they might have from prior years."

But not all improvements make it to depreciation schedules. Check 35 years of repairs and maintenance expenses and you might find them there. Without actual proof that those improvements were never accounted for, I'm not going to use them.

Slava Ukraini!

T

Terry53029

Intuit Community Champion

@kuesters You need to file form 3115 if there were improvements never depreciated, but clients should show their records, and not just pull a number out of thin air. If they have no records then I would not account for them, and if client not ok with that I would ask him to go elsewhere.

BobKamman

Level 15

How reliable is Google? Well, I just moved to a new office and the Maps app on my clients' phones direct them to the dead-end alley in back of the building, which is separated from it by a wall. So don't rely too much on what Google tells you. But,

The IRS provides three main safe harbor rules that may allow rental property owners to immediately expense certain improvements and repairs, rather than capitalizing and depreciating them over several years.

The primary safe harbors are the Safe Harbor for Small Taxpayers (SHST), the De Minimis Safe Harbor, and the Routine Maintenance Safe Harbor.

1. Safe Harbor for Small Taxpayers (SHST)

This safe harbor allows qualifying landlords to expense all annual costs for repairs, maintenance, and even improvements in the year they are incurred.

Property Value Limit: The unadjusted basis (original cost of the building, excluding land) of the rental property must be $1 million or less.
Annual Expense Limit: Total expenses for repairs, maintenance, and improvements during the tax year cannot exceed the lesser of $10,000 or 2% of the building's unadjusted basis.
Income Limit: The taxpayer's average annual gross receipts for the three preceding tax years must be $10 million or less.
Election: This safe harbor must be elected annually by attaching a statement to your tax return.
2. De Minimis Safe Harbor
This rule is an administrative convenience that allows immediate expensing of low-cost items, regardless of whether they might technically be considered repairs or improvements under normal rules.
- Dollar Limit: The cost must be $2,500 or less per item or per invoice line item for taxpayers without applicable financial statements (audited financial statements). The limit is $5,000 for those with applicable financial statements.
- Consistency: You must have a consistent accounting policy in place at the beginning of the year for expensing items below this threshold.
- Election: Like the SHST, this is an annual election made with your tax return.
  
  3. Routine Maintenance Safe Harbor
  
  This safe harbor allows the immediate deduction of recurring maintenance costs, even if they might otherwise be considered improvements, as long as they meet specific criteria.
  
  Definition: Routine maintenance is work you reasonably expect to perform more than once every ten years to keep the property in ordinarily efficient operating condition. Examples include scheduled HVAC servicing, inspection, cleaning, or replacing worn-out parts with comparable components.
  
  Limitations: It cannot be used for betterments (fixes a material defect or increases capacity), restorations (rebuilds to a like-new condition), or adaptations to a new use.
  
  Election: This safe harbor is an accounting method adoption, not an annual election, and typically requires filing Form 3115 to change methods if you haven't used it consistently.

T

Terry53029

Intuit Community Champion

I agree with Bob about google, although not sure what it has to do with this post

IRonMaN

Level 15

I don't think it is the anvils talking, but I'm thinking he is confirming that some of those improvements over the last 35 years could have been expensed.

Slava Ukraini!

K

kuestersAuthor

Level 2

Thanks for all the info. I am actually asking how to enter these assets into the Pro Series program to ensure they are included in the basis, allowable depreciation, and gain calculations. There is a depreciation code (I think "X") designated as non-depreciable assets, but it doesn't calculate/add the allowable depreciation amount when calculating depreciation recapture.

To answer some of the other responses: No, this is not a prior client of mine and they are not a current client of mine, they are a friend who has shown me the supporting documentation for the improvements. He is also clueless about taxes and relied on some individual tax preparer who just retired and left the area.

T

Terry53029

Intuit Community Champion

@kuesters You would open a schedule E, go down to deprecation, and when you click on that line the worksheet will open for you to enter assets

K

kuestersAuthor

Level 2

This answer does not address my question.

I know how to enter assets for a rental property, but there is nowhere in the asset entry form that specifically discusses assets that were not depreciated. This matters because tax code requires when you sell a rental property the taxpayer must separate gain into two buckets: (1) the portion equal to depreciation you claimed or should have claimed, which is taxed as “depreciation recapture,” and (2) the remaining gain, which is taxed as long‑term capital gain. This rule applies whether or not you actually took the depreciation.

Type of Asset Code = "X - Non-Depreciated Asset" will not automatically include the depreciation not previously claimed in the gain taxed under the depreciation recapture rules. How do I enter the undepreciated assets in the asset entry form to properly include the undepreciated amounts in the depreciation recapture compoent of the capital gain.

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