2023 Rental Property Depreciation Question

[fizzylogic]

For several decades, I've been managing a residential rental property held in a revocable living trust for a family member.  When the grantor passed away in 2015, the living trust converted to an irrevocable trust and was assigned a tax ID number.  The property received a stepped-up basis, with depreciation starting anew as of that date.  None of the yearly rental income has been distributed, but instead held entirely in the trust.  This property was the trust's final asset.  In preparation for selling it, the successor trustee executed a Deed of Distribution in mid-September 2023, transferring ownership to the beneficiary.  As of January 2024, the property still has not sold.

It is my understanding that the property does not receive another stepped-up basis.  Instead, the beneficiary assumes the basis established in 2015, along with the accumulated depreciation since 2015, and will be responsible for all depreciation recapture once the property sells.  My question regards how the depreciation deduction is properly claimed on 2023 tax returns.

Is it as simple as allocating the depreciation amount from 1/1/23 to 9/15/23 to the Trust's 1041 Schedule E, and the amount for 9/15/23 to 12/31/23 to the beneficiary's 1040 Schedule E, or is there more to it?

Thanks for the assist!

[tagteam]

There is really no more to it than what you delineated.

The depreciation deduction follows the income. 

[fizzylogic]

Many thanks, tagteam! I was concerned because this approach just seemed too easy.

Related question: In August, we installed new carpet in the house and in November, we purchased a new refrigerator and range.  If not for the Deed of Distribution, the full depreciation for these items would have been allocated solely to the trust, as follows: 80% bonus depreciation plus MACRS for 5-year property, using half-year convention since the cost of items purchased in November was less than 40% of the total for the year.

The Deed of Distribution was executed in between these purchases, so I'm thinking the allocation should instead be as follows: Carpet-only depreciation assigned to the trust and calculated as above, but appliances assigned to the beneficiary with 80% bonus depreciation plus MACRS for 5-year property, using mid-quarter convention for the 4th quarter.  Am I on the right track here?  Thanks again!

[tagteam]

The deed actually makes little difference to allocation. Rather, it was which party was assigned income for the period in question. If it was the beneficiary, then the beneficiary would get the deduction.

[Mike9241]

A deed of distribution is a legal document that transfers the assets of a trust to its beneficiaries. According to FindLaw, a trust typically ends with the distribution of property. 

[fizzylogic]

This was my layperson's understanding, too, that the property is removed from the trust and the beneficiary becomes the legal owner—now personally responsible for all income, expenses, and taxes as of the date the DoD is executed.  What complicated this transaction in my mind was that it's treated more like a gift transfer than an inheritance, hence no step-up in basis and my uncertainty as to how depreciation is properly allocated.

I'm trying to get my arms around this now so I can update the Schedule E workbook I prepare for the property each year, before I start plugging it all into TurboTax later this month.

[tagteam]

Correct. There is no step up in basis; the beneficiary takes the trust's basis and the trust's ownership would terminate on the date of the transfer.