Home improvement, rental improvement, and 1031 exchange

[eva]

Taxpayers owned and lived in a home from 2008 until 2019.  In 2019 they rented out the home for two full years and then did a 1031 exchange for other properties.
They did extensive remodeling at the time they lived in the property and then additional remodeling before they started to rent and then additional renovations when they did the 1031 exchange.
My questions is regarding how to treat all these improvements? How do you incorporate the before rental while they were living in the home with the rental improvements? The rental-related improvements should be capitalized and deferred and then recaptured at the time of selling the 1031 properties.  But what do you do with the original improvements?  When do you add them to the basis if ever?
Thank you for any advice relating this question.

[TaxGuyBill · Accepted solution]

Improvements are added to Basis when they are made.

The pre-rental improvements should have already been factored in when it became a rental.  They should have already been part of the Basis for depreciation, and are part of the Basis for calculating the 1031 numbers.

[eva]

I understand.  The additional issue is that the taxpayer never claimed anything for depreciation when they started the rental.

I will have to correct that and go from there.

Thank you very much for guiding me!

[jeffmcpa2010]

No help now but I wonder who advised them to do a 1031 exchange when they had the personal residence exclusion sitting on the table.....

[TaxGuyBill]

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@jeffmcpa2010 wrote:

No help now but I wonder who advised them to do a 1031 exchange when they had the personal residence exclusion sitting on the table.....

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You actually can do both.

[eva]

Who knows?  And they hardly squeaked by the two year holding period. 

There is another thought, which I have to do calculation for.

The new property(ies) have to be equal or higher value than the exchanged property.

I wonder after increasing the basis, if they would have still qualified?

[TaxGuyBill]

Even with a high Basis they could still do the Exchange, but the deferred part (the purpose of the exchange to delay tax) would be reduced or possibly eliminated.  But I think that is what you are figuring out now.

[eva]

It's going to be an interesting exercise...

Thank you very much again for you help!