It can be confusing. Based on the information in IRS Publication 555 for community property, you would change the cost basis of your property to the fair market value (FMV) on the date of death if you are the only heir and the house belongs to you after death under community property with right of survivorship. This could become the new basis to you in community property states (see below) if you qualify. Our Tax Expert @RobertB4444 was explaining to you about joint tenancy. There are two types of ownership, see below.
You must decide or check with a lawyer to determine if you fall under joint tenancy or community property with a right of survivorship.
- Joint tenancy property owned by married couples. When the first spouse dies, the property is adjusted to FMV for half of the property for the deceased. Joint tenancy appears the most common way to take title.
- Community property with right of survivorship the entire property (not just the half belonging to the deceased spouse) will receive a FMV basis on the first death. FMV for the entire property becomes the basis for the spouse on the date of death until his or her death.
Action Steps:
- Community Property with right of survivorship: Change the original rental property asset cost to the FMV on the date of death. Leave the date placed in service as is (do not change it). TurboTax will calculate the current and all prior depreciation for your rental house. Keep all the records for the depreciation actually used before the death of your spouse. It will be needed at the time of sale.
- Joint tenancy: Change the current rental house to half the original cost, leave the date acquired and other details the same. TurboTax will calculate the current and all prior depreciation for half the cost basis. Next take half the FMV at death, use half of this as your cost basis and begin placed in service date for the current year. TurboTax will calculate the other half of the rental home.
Once this is completed your rental property will be accurately entered into the tax return.
Death of spouse.
If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule doesn't apply to registered domestic partners).
Example.
Bob and Ann owned community property that had a basis of $80,000. When Bob died, his and Ann's community property had an FMV of $100,000. One-half of the FMV of their community interest was includible in Bob's estate. The basis of Ann's half of the property is $50,000 after Bob died (half of the $100,000 FMV). The basis of the other half to Bob's heirs is also $50,000.
Please update here if you have more questions about how to change your rental property.
@Missy008
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