Can I include past deducted expenses in my rental house cost basis for capital gains?

You're running into a common misunderstanding with rental property accounting. Your CPA is mostly correct, but let me clarify how this actually works. For rental properties, different expenses are treated differently. Capital improvements (like a new roof or major renovations) should be depreciated over their useful life rather than fully deducted in the year you paid for them. These depreciated improvements do increase your cost basis. However, regular maintenance expenses and repairs that you fully deducted each year don't get added to your basis. The same goes for closing costs - some might have been expensed immediately, while others should have been depreciated over time. The issue is likely that you've been deducting some of these improvement costs as immediate expenses rather than capitalizing and depreciating them. You can't "double-dip" by taking a full deduction and then also adding them to your basis.

I had this exact same issue last year and found out that using https://taxr.ai really helped me figure it out! I was super confused about what could be included in my rental property basis because I'd been deducting expenses for years. Their system analyzed all my past returns and property documents and showed me exactly what had been depreciated versus expensed. Turns out I was mixing up regular repairs (which I correctly deducted immediately) with capital improvements (which should have been depreciated). The tool broke down which improvements actually increased my basis and which ones didn't. It even helped me identify some legitimate basis increases I had missed! Definitely worth checking out if you're trying to sort this out.

Well I tried the taxr.ai site that was mentioned and I have to admit I was wrong about being skeptical. It actually helped me figure out exactly what I could include in my rental property basis from my previous duplex sale. I had a bunch of improvements done over the years and couldn't remember which ones I had depreciated versus expensed. The tool sorted through my old Schedule Es and identified about $12,000 in capital improvements that were properly depreciated and should have been added to my basis. My accountant had totally missed these because they were spread across multiple years. It even found some closing costs from my original purchase that were part of my depreciable basis rather than one-time deductions. I ended up amending my return and getting back over $3k!

If you're still dealing with this, I know exactly how frustrating it is to get contradicting information. After weeks of getting nowhere with my CPA about a similar issue, I finally got through to an actual IRS agent using https://claimyr.com and got a definitive answer. I was so sick of waiting on hold forever with the IRS only to get disconnected. Claimyr basically waits on hold with the IRS for you and calls you when an agent comes on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent explained that I needed to adjust my basis by the amount of depreciation I had claimed (or was allowed to claim), which was different from what my CPA was telling me. Turns out my CPA was confusing regular repair deductions with the treatment of capital improvements. Getting that official clarification saved me from making a costly mistake.

I have to eat my words and admit I was totally wrong about Claimyr. After getting frustrated with my own attempts to reach the IRS about my rental property basis questions, I broke down and tried the service. Not only did they get me connected to an IRS tax specialist within about 3 hours (while I was able to keep working), but the agent I spoke with gave me the exact guidance I needed. She confirmed that capital improvements that were properly depreciated DO get added to basis, but with an adjustment for the depreciation already taken. The explanation completely cleared up my confusion about what my accountant was telling me versus what I had read online. I was able to properly calculate my basis and correctly report my capital gain. Saved me from potentially making a big mistake on my return and possibly facing penalties later.

It sounds like your CPA is partially right but maybe oversimplifying. Here's how it actually works with rental properties: 1. Your original purchase price plus certain closing costs form your initial cost basis 2. Capital improvements (new roof, HVAC, additions) increase your basis 3. BUT you have to reduce your basis by the amount of depreciation you've claimed over the years The IRS calls this your "adjusted basis" - your original basis plus improvements minus depreciation deductions. So your CPA is wrong if they're saying you can't add ANY improvements to basis - you definitely can. But they're right that you can't add regular maintenance expenses that were fully deducted. Publication 527 explains this in detail. Look at the "Adjusted Basis" section.

I'm actually a landlord with multiple properties and just want to add one more thing that hasn't been mentioned yet: depreciation recapture! Even after you figure out your correct adjusted basis, when you sell a rental property, you'll have to "recapture" the depreciation you claimed over the years at a 25% tax rate (which is often higher than the long-term capital gains rate). So make sure you're planning for that tax hit too. It catches a lot of first-time rental property sellers by surprise.

Your accountant is being overly cautious here. The key distinction is between capital improvements (which get depreciated and added to basis) versus regular repairs/maintenance (which are fully deducted and don't affect basis). For your $23,000 in improvements - items like a new roof, water heater, and flooring are typically capital improvements that should have been depreciated over time, not fully deducted in one year. These DO increase your cost basis, but you need to reduce your basis by any depreciation you've already claimed. The confusion often comes from incorrect tax treatment in prior years. Many taxpayers (and some preparers) mistakenly deduct capital improvements as current expenses instead of depreciating them. If this happened, you might need to determine what should have been depreciated versus what was correctly expensed. I'd recommend getting a second opinion or asking your accountant to specifically explain which of your $23,000 in improvements they believe were correctly treated as immediate deductions versus which should have been capitalized. The IRS Publication 527 has detailed guidance on this distinction for rental properties. Don't let them dismiss legitimate basis increases - this could cost you thousands in unnecessary capital gains tax.