What Form 8949 Adjustment Code should I use for investment property repair costs?
I recently sold an investment property and I'm trying to figure out how to report it correctly for taxes. Bought the place for $350K, sold it for $475K, but had to put in about $65K in repairs and renovation costs over the years. The issue is that I didn't receive a 1099-S from the closing. I'm entering this as a short term capital gain since I only owned it for about 11 months. When I got to Form 8949, I entered an adjustment of -$65K to account for all those repair costs, but now my tax software is asking for an adjustment code and I'm stuck. Should I be using code L for this situation? Or is there another code that would be more appropriate? I want to make sure I'm doing this right since it's a significant amount. Thanks for any help!
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Hunter Edmunds
You'll want to use Code L for your situation. Code L is for "adjustments not explained in the instructions for the form" which includes capital improvements like your repairs. Those repair costs should definitely be added to your basis, which effectively reduces your gain. Make sure you have documentation for those repairs in case of any questions later. The IRS might want to see receipts or invoices showing these were legitimate capital improvements and not just regular maintenance (which wouldn't be added to basis). Also, double-check that these truly are short-term gains. If you owned the property for exactly 12 months or longer, it would qualify for long-term capital gains rates, which are typically more favorable.
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Ella Lewis
•Thanks for this info. I'm in a similar situation but I'm confused about the difference between repairs and improvements. If I replaced a water heater, is that a repair or improvement? And what about painting the whole interior before selling?
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Hunter Edmunds
•Replacing a water heater would typically count as a capital improvement since you're adding something with a useful life of more than one year. It increases the value of the property and extends its useful life. Interior painting before selling is more of a gray area. If it's just normal maintenance painting, the IRS might consider it a repair rather than an improvement. However, if it's part of a larger renovation project or if you're painting for the first time in many years as part of preparing the property for sale, you may have a case for categorizing it as an improvement. Document everything and be consistent in how you categorize expenses.
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Andrew Pinnock
Just sharing my experience - I was struggling with similar Form 8949 adjustment codes earlier this year when reporting sale of a rental property. After going in circles with different tax professionals, I found an AI tool called taxr.ai (https://taxr.ai) that analyzed my situation and documents. I uploaded my settlement statement and renovation receipts, and it identified all eligible costs that could be added to my basis using the right adjustment codes. It even helped me separate what counted as repairs vs capital improvements, which was super helpful since I had a mix of both. The detailed report it generated made it easy to enter everything correctly and gave me peace of mind that I wasn't missing anything.
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Brianna Schmidt
•Does this tool work for stock sales too? I've got a bunch of crypto transactions with weird basis issues and the adjustment codes are driving me nuts.
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Alexis Renard
•I'm skeptical about trusting AI with tax stuff. How does it know the difference between what the IRS would consider a repair versus an improvement? That's something even professionals debate about.
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Andrew Pinnock
•Yes, it actually works really well for stock and crypto transactions. It can analyze your trading history and help determine correct basis calculations, especially for wash sales or when you've acquired assets at different price points. It gives you the proper adjustment codes for each situation. For distinguishing between repairs and improvements, it follows IRS guidelines and asks clarifying questions about each expense. It's pretty thorough about applying the correct tests that the IRS uses - like whether something adds value, prolongs useful life, or adapts the property to new uses versus just keeping it in normal operating condition.
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Brianna Schmidt
Just wanted to update - I tried taxr.ai after seeing the recommendation here and it was exactly what I needed! I uploaded my crypto transaction history which was a complete mess (multiple exchanges, some missing cost basis info) and the system sorted it all out. It identified which transactions needed adjustment codes and specifically which codes to use. Saved me hours of research and probably a lot of money too since I was making some major mistakes. Definitely worth checking out if you're dealing with Form 8949 headaches.
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Camila Jordan
For anyone dealing with Form 8949 issues, just be aware that if you need to get clarification directly from the IRS, good luck getting through to anyone. I spent 3 weeks trying to get an agent on the phone about adjustment codes, just kept getting disconnected or waiting for hours. Finally used a service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent within 45 minutes. They have this cool demo video showing how it works: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that Code L was correct for my situation with property improvements and even explained some nuances about what qualifies as a capital improvement versus a repair. Worth considering if you need definitive answers from the IRS without wasting days on hold.
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Tyler Lefleur
•How does this actually work? I don't understand how they can get you through when the IRS phone lines are so backed up.
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Alexis Renard
•This sounds like BS honestly. If the IRS phone lines are jammed, how can some third party magically get through? And they probably charge an arm and a leg for this "service.
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Camila Jordan
•They basically use an automated system that calls and navigates the IRS phone tree continuously until it gets through, then it calls you when it has an agent on the line. It essentially does the waiting for you so you don't have to sit there with your phone for hours. I was skeptical too, but it actually works. The IRS phone system is just really inefficient - their call capacity isn't necessarily the issue, it's that their system hangs up on people when the queue gets too long. This service just keeps redialing and navigating the system until it succeeds.
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Alexis Renard
I have to eat my words. After being totally skeptical about Claimyr, I gave it a try out of desperation since I had a similar Form 8949 issue with multiple adjustment codes needed. I was getting conflicting advice from different sources about whether to use Code L or Code B for some of my situations. The service actually got me connected to an IRS agent in about an hour. The agent walked me through exactly which codes to use for different types of adjustments on my 8949. For property improvements like the original poster mentioned, they confirmed Code L was correct, but I also learned I needed to use different codes for some of my other transactions. Really glad I didn't just guess and potentially trigger an audit.
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Madeline Blaze
Just to add some clarity on Form 8949 adjustment codes for investment property improvements: Code L is for "other adjustments" which covers your improvements and repair costs that increase basis. Code B would be if your basis was incorrect on a 1099-B, which doesn't apply for real estate typically. And Code T is for adjustments to basis due to wash sales, which also doesn't apply to real estate. Make sure you keep all receipts and documentation for those improvements for at least 7 years after filing. The IRS can question those adjustments.
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Jade O'Malley
•Thank you for the explanation! That makes it much clearer. For the documentation, does taking photos of the improvements before/after help strengthen my case if I'm ever audited? Some of my older receipts from early renovations aren't in great shape.
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Madeline Blaze
•Yes, before and after photos are excellent supporting documentation! They provide visual evidence that the work was actually done. If your older receipts are faded or damaged, photos become even more important. I'd also recommend creating a spreadsheet documenting each improvement, the date, cost, contractor (if applicable), and a brief description of how it improved the property. This organized approach really helps if you ever face questions about these expenses. Bank statements showing payments to contractors can also serve as backup documentation if original receipts are damaged.
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Max Knight
If you have multiple types of adjustments to make on Form 8949, do you need to create separate line entries for each type of adjustment, even if they're for the same property?
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Hunter Edmunds
•Yes, if you have different types of adjustments requiring different codes, you should create separate line entries even for the same property. For example, if you have some costs that qualify under Code L and others under a different code, you'd list the property twice with the respective adjustment amounts and codes. This makes it clearer for the IRS to understand your calculations and reduces the chances of questions or audit. It might seem like extra work, but it's much better than lumping different types of adjustments together under a single code.
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Andre Dupont
Great thread! I've been dealing with similar Form 8949 issues and this has been really helpful. One thing I'd add is that if you're unsure whether something qualifies as a repair vs. improvement, the IRS uses what they call the "betterment, adaptation, or restoration" test. If your work makes the property substantially better than it was before, adapts it to a new use, or restores it to a serviceable condition after it had deteriorated, it's likely a capital improvement that can be added to basis using Code L. For example, replacing old single-pane windows with energy-efficient double-pane windows would be betterment. Converting a basement into a rental unit would be adaptation. Replacing a roof that was leaking badly would be restoration. All of these would qualify for Code L adjustments. Simple maintenance like fixing a leaky faucet or touching up paint wouldn't meet this test and can't be added to basis - those are just regular repair expenses.
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Anastasia Kuznetsov
•This is incredibly helpful! The "betterment, adaptation, or restoration" test really clarifies things. I've been struggling with some borderline cases - like I had to replace all the flooring in my rental property because the old carpet was completely worn out and stained. Based on your explanation, since it was restoring the property to a serviceable condition after deterioration, that would qualify as a capital improvement under Code L rather than just maintenance. Thanks for breaking down the IRS criteria so clearly!
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