Investors & landlords

So, my mother died in August and I inherited a rental property from her.

I'm sorry for your loss. I know having to deal with the taxes doesn't exactly make things any easier either.

I know that the fair market value is what I will base my depreciation on in general, but I'm also preparing her final return-- Do I also depreciate it on her taxes or is there some sort of rule for which tax return I depreciate it on?

Yes, depreciation on her personal 1040 tax return that you are completing on her behalf, will continue as normal. You're only taking 7 or 8 months of depreciation for 2020 anyway, as that return you're completing for her only covers income/expenses received/incurred up to the date of her passing.

As of the date of her passing one of two things will happen, depending.

 - If the property went through probate (weather she had a will or not, this is usually what occurs) the property was transferred to and titled to the estate. All prior depreciation is "carried over" to the estate. All rental income/expenses incurred from the date of her passing until the property was titled to you, is reported on the 1041 Estate tax return. Once the estate has disposed of all assets (which would include the rental property) then the 1041 Estate return being filed is marked as "final" in the tax year all assets of the estate are disposed of. Usually through inheritance, estate sale, charitable donation, or any number of other methods of disposition.

Once the property is titled to you, then there are a number of things that will change.

- your cost basis in the property is the FMV of the property on the date of your mother's passing. That will most likely be quite a bit higher than what your mother's cost basis was.

- All prior depreciation taken by your mother and the estate just "evaporates". Your acquisition date will be the date the property was titled to you. (and your cost basis of that acquisition is the FMV of the property on the date of your mother's passing.... *NOT* the date it was titled to you.)

When you enter the property on your 1040 tax return, you have to indicate how you acquired the property. One of the selections is that you inherited it. You'll select that one.

If you intend to keep renting the property out, then you can classify it as residential rental real estate with an "in service" date of the same date you acquired it (assuming there was a renter in the property on that date, or the property was at least being advertised for rent on that date.)

-Depreciation starts all over for you, based on your new FMV of the property. The rental property will be depreciated over the next 27.5 years starting on the date you inherited it, or the date you placed the property  "in service"; whichever date is last.

She got more months worth of rent than I did but I'm the poor sucker who had to throw six thousand in repairs at the horrid thing.

Your cost are claimable on your tax return. For those things that qualify as property improvements, they actually add to your cost basis and get depreciated over time, just like the rental property itself gets depreciated over time. For those things that qualify as repairs, maintenance and other types of expenses, they are deductible in the tax year you incurred those expenses.

Below is some information I'm hoping you'll find helpful and educational on this. If you have more questions (and if you're a first time landlord, I'm sure you will) then by all means, please ask.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that “better” the property. Basically, they retain or add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.