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I sold a rental property last year, so I'm filing Form 4797. I owned it for several years, and had a new roof installed a couple years ago. As I understand, the land (which cannot be depreciated) goes in Part I, while the structure and roof go in Part III (both depreciated over 27.5 years). However, right before I sold, I also replaced the HVAC system and carpet. As far as I can tell, those would go in Part II. (It does not appear that I can add improvements in with expense of sale in Part III, line 21. If I could that would simplify things greatly.)

My question is, how do I determine how much of the sales price and expense of sale to allocate to each of these 5 items? It would be in my interest to minimize the short-term gains while maximizing the long-term gains. But that also seems somewhat fair considering how briefly I owned the HVAC system and carpet.

My first thought was to divide the sales price and expense of sale equally between the land and everything else. Then among the 4 components of "everything else", I allocate a roughly proportional amount of the expense of sale to each. For the HVAC and carpet, I put a sales price a little higher than what I paid, such that after the expense of sale, it comes out to zero gain. Is this fair? If not, is there any guide for how to allocate gains between multiple components of the same rental property?

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