Would greatly appreciate hearing if I have a correct picture view on how the capital gain and depreciation is handled for rental property when sold by the surviving spouse.
My parents bought a rental property back in 1970. Father passed away in 1989. Mother wants to sell it in 2022. Say back in 1970, they paid 50,000. In 1989 FMV was 100,000. Current market value is 300,000. These prices include the value of Land and after subtracting that, the price of the structure are 40,000, 80,000, and 240,000, respectively.
They held title as joint tenancy and therefore in 1989, only the basis of my father’s half is stepped up. So half of the original price (includes land), ie. 25000, is stepped up to 50000. Mother’s basis from date father passed away in 1989 is 50,000 plus 25,000 or a total of 75,000 and the basis for land is 15,000 (If title was held as community property with rights of survivorship, the step up would have been to the 1989 FMV of 100,000).
The structure, but not land, is to be depreciated for the next 27.5 years. From date of passing, it is 75,000 minus 15,000 or 60,000. All previous depreciation amounts are irrelevant.
Now in 2022, a sale of the rental property at 300,000 is completed. Depreciation of 60,000 for the structure has been fully taken. Say another 10,000 of depreciation for carpet replacements were fully taken since 1989. So a total of 70,000 is subject to recapture taxes.
For calculate the capital gain to be taxed, the selling price of 300,000 less the stepped up basis of 75,000 and less selling fees of say 20,000 equals 205,000.
Lastly, estimated taxes should be paid!
Thank you for any feedback!
