Please review this Turbo Tax link for more information. In Revenue Ruling 63-223, the IRS stated that depreciation determined for the period after a decedent's death shall be computed using the fair market value as of the date of death or the fair market value on the alternate valuation date,The accumulated depreciation on the rental property prior to the decedent's death is irrelevant. I am not sure if your stepped up basis of $140,000 is correct. The stepped-up basis is what the FMV or what the house is worth in the open market on the date of death or alternate valuation date.
The way that this is interpreted is that you need to begin depreciating once the FMV was determined at the date of death or alternate valuation date. Whatever that depreciation amount is between your wife's date of death or alternate valuation date and when you sold the house is what needs to be recaptured.
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