Questions concerning 1041 Return for Estate with a rental property

[randy5419]

I have questions for how to file returns for my Mother who died in 2023, and who owned a rental home.   I need to file a 1040 for the part of the year she was alive, and a 1041 form for her estate for the part of the year she was not alive.   The rental home had both income and expense in both parts of the year.   There are many separate assets contributing to the property’s tax depreciation.   The home will sell this coming week and I will report that on the estate’s 2024 1041 return (which will be the final return for the estate). 

My first thought was to enter the rental property income and expenses into 2023 1040 Turbotax  for the entire year to get full-year figures for Schedule E and the other forms, but then to divide the full-year figures into two parts based on the portion of the year my Mom was alive.   If I did that, I would have to manually enter numbers into both the 1040 and 1041 returns.   Would that be proper, and would Turbotax allow me to enter numbers into the forms manually?

Another approach that came to mind was to fill in the 1041 form as if the Estate acquired the property at a cost equal to its stepped-up basis, and then have the Estate depreciate the property for the part of 2023 that it owned the property (all of it as a 27.5 year asset).    

How should this be done?

[DianeW777]

You are on the right track.  File her personal return selecting the property was disposed of, converted to personal use, then you will answer the 'Special Handling' question which will take care of all the proper information on your mother's return. TurboTax will handle the correct depreciation on her return and of course entering only the expenses paid while she was alive in 2023. The steps below will take care of your mother's return for 2023.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Wages & Expenses
2. Scroll to Rental properties and royalties, click Edit/Add or Start/Revisit
3. Do you want to review your rental?, click Yes
4. Under Rent and Royalty Summary, click Edit
5. Click Update to the right of Assets/Depreciation.
6. Once you reach this screen for each asset, you must select 'This item was sold, retired, stolen, destroyed, disposed of, converted to personal use....' 
7. Next enter the date you stopped using the asset for rental purposes - her date of death. 
8. And answer 'Yes' you always used this asset 100% of the time for business. (The percentage of use doesn't change until after conversion from rental to personal use.)
9. Select 'Yes' for Special Handling due to 'You converted the asset to 100% personal use'.

Next, you will use the stepped up basis for the estate (Form 1041) and the date placed in service will be the date of death.  The depreciation for the remainder of the year will be correct by using the 27.5 year recovery period.  Enter only the expenses paid for the rental property for the remainder of the year.

@randy5419

[Edited: 03/11/2024 | 8:20 AM PST]

[randy5419]

Thank you!!!

[randy5419]

DianeW777:  Your instructions work perfectly for my Mom's personal return done with Turbotax Deluxe, but I must do the Estate return with Turbo Tax Business, and it behaves differently than TurboTax Deluxe.   For the Estate Return, I want to add the home as a rental property with an acquisition cost equal to the stepped-up basis, and then to depreciate it only until 9/30/23 when the home was vacated so it could be made ready for sale.   TurboTax Business does not offer “Special Handling that takes the asset out of service without selling it.  

I did verify that in TurboTax Deluxe I could add a 27-1/2 year property acquired on my Mom’s date of death and convert it to personal use on 9/30/23, and it prorates the depreciation as you would expect.  

Any suggestions would be appreciated.   Thanks!

[randy5419 · Accepted solution]

As this is a question is about the functionality of TurboTax Business, I created a brand-new post posing my questions.   

[patdevlin0101]

based on your response the Final return for decedent does not have any tax due for the rental property (conversion)? what if there was more than 1 rental property?  no recovery of depreciation? and if the estate sells the property fairly quickly there most likely will not be a capital gain for the estate for the disposition?

[JotikaT2]

It sounds like you want to know if the treatment would be different if there was more than one rental property.  The treatment would be very similar.  Be careful though, the individual return will only report the activity up to the date of death.  Anything after that would be reported accordingly on the trust return.  You cannot lump them together as if they are the same thing since the assets essentially transfer from the individual return to the trust return.  There are also several types of trusts so the answer on how the trust reports the sale may vary. 

Please see this link for more details on the types of trusts that are available.

If this does not answer your question, please comment with more specifics as it relates to your situation so we can assist you.

@patdevlin0101 

[randy5419]

Please see the post that I marked as best answer.  I'm sorry that I didn't do that a long time ago.