Copying the depreciation schedule for a gifted property

[eltinian]

Hi,

I’m getting gifted a property from my father and am trying to copy over all the depreciation and amortization schedules that already exists, since I believe it has to be continued. I have his previous tax returns, but how do I do this on Turbo tax? 

In the assets/depreciation section of the property, I simply see that it asks me for the cost and land value if it’s included in the cost. Where/how do I add rest of the schedules associated with the property? 

[ColeenD3]

What type of property and are you still treating it as business or rental?

Each section of the program, Self Employed or Premier, has an asset section. You would enter the building there. When you put the basis of the building, the program will calculate the prior deprecation and ask you if it is correct. You can make adjustments.

If you continue this as a business property, yes, you will continue depreciation.

Any gift of depreciated property will trigger the so-called dual basis rules under Section 1015(a). 

Section 1015(a). This section states, in pertinent part, that for property acquired by gift, "the basis shall be the same as it would be in the hands of the donor...except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value."

[eltinian]

Hi @ColeenD3, thanks so much for the quick response! 

What type of property and are you still treating it as business or rental?

• It’s a residential property, and he had treated as a business before (he had QBI for this). Would I still qualify if I don’t put in 250+ hours of residential services though? 

Each section of the program, Self Employed or Premier, has an asset section. You would enter the building there. When you put the basis of the building, the program will calculate the prior deprecation and ask you if it is correct. You can make adjustments.

• I think I did that, but the basis includes upgrades to the house too, correct? However, each upgrade or change to the property has a different depreciation schedule. If that’s the case, how do I reflect all these dofferent schedules that pertain to the same property?

Any gift of depreciated property will trigger the so-called dual basis rules under Section 1015(a). 

Section 1015(a). This section states, in pertinent part, that for property acquired by gift, "the basis shall be the same as it would be in the hands of the donor...except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value."

• from my understanding of this, it’s that in this situation of a gift, the cost is either FMV OR adjusted cost basis, whichever one is lower. Is that correct? 
  
  

Thanks for your time! 

[ColeenD3]

1) T be eligible for QBI:

What if you own a rental — or three — but don’t qualify as a real estate professional? Turns out you can qualify for the QBI deduction, as long as your rental activities constitute a trade or business.

Generally, this means each rental real estate enterprise (a rental property or group of similar rental properties, including K-1 rental income) must satisfy these requirements:

1. Each enterprise maintains its own books and records to track income and expenses;
2. At least 250 hours of rental services are performed per year per enterprise; and
3. (Starting with tax year 2019) Contemporaneous records of services performed are kept which includes who performed the service, description of service, the date of the service, and how long it took (who, what, when, and how long).

Rental services can be performed by the owners or by their employees, independent contractors, or agents and would include things like:

• General operation, maintenance, and repair of the property
• Purchasing materials
• Property management activities
• Supervising employees and contractors
• Advertising the property for rent
• Tenant selection and background checks
• Negotiating and executing leases
• Collecting and depositing rent

2)You would enter the same assets the same way they were already reported.

3) 

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property.

• Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property.
• Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property

NOTE: If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.

If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift.

[eltinian]

1) It looks like I do not meet the 2nd requirement for “At least 250 hours of rental services are performed per year per enterprise;”, so I would not qualify for QBI in that case. Is that correct? 

2) I have his physical tax returns of all the listed depreciations for his assets with different schedules, but my question is how to input that same information into TurboTax? The Asssets/Depreciation section only asks me for cost/land value, but doesn’t ask about the method (SL, DB, etc.), life of the asset, or anything else like that. I’m assuming that each asset needs its own entry, is that correct? (E.g. building would be one entry, improvement A would be another, painting would be another, etc.) 

[Carl]

Assuming you were gifted the rental property in 2021.

If you will look at the 2020 tax return of the giver, you need the Form 4562 that prints in landscape format and is titled "Depreciation & Amortization Report". You need to enter each asset into TTX 2021, "exactly" as it appears on the 4562. The only two columns on the 2020 form 4562 you will not enter for each asset listed, is the amounts in the "prior years depr" column and the "current years depr" column. The TTX 2021 program will automatically plug in the correct numbers in those columns for 2021, for you.

[eltinian]

@Carl thanks for the help, too! Will try that out! 

[eltinian]

@Carl would you know how to input a partial year on a continuous depreciation schedule? If I copy over the schedule, it continues for the full year's worth of depreciation even though I was gifted it within the year. I see options for gifting it away, but I'm the recipient - thanks! 

[Carl]

If I copy over the schedule, it continues for the full year's worth of depreciation even though I was gifted it within the year

When you receive a rental property as a gift, you also get as a gift, all the prior year's depreciation, as well as all the passive activity carry over losses (if any) from the giver. Your depreciation history will be identical to that of the giver. Therefore, your "in service" date will be identical to that of the giver.

[eltinian]

When you receive a rental property as a gift, you also get as a gift, all the prior year's depreciation, as well as all the passive activity carry over losses (if any) from the giver. Your depreciation history will be identical to that of the giver. Therefore, your "in service" date will be identical to that of the giver.

I believe that's what I'm doing right now (date acquired/date in service are the exact same as his, as well as the calculated prior accumulated depreciation, etc.). However, the calculated depreciation that TurboTax says I should claim for this year is the full amount for the year rather than a portion of it (he claimed depreciation for N number of months he owned it before gifting it to me. Not sure what software he used to get that). How do I get the other portion (12-N months) of depreciation? Let me know if that makes sense or if I should clarify, thanks in advance for your time!

[Carl]

TurboTax says I should claim for this year is the full amount for the year rather than a portion of it (he claimed depreciation for N number of months he owned it before gifting it to me.

He gifted you "ALL" depreciation taken, up to and including the day he gifted it to you. The program is doing things correctly.

[Rick19744]

@eltinian I think if you provide some additional details they will see what your question is:

• Your father owned the property up to a certain date
• You were gifted the property on a certain date
• Provide @Carl with the date the property was gifted to you
• They should then understand that your father receives some depreciation up to the date of the gift and then you receive the depreciation post gift.  Since this didn't occur on 1/1/2021 each return only gets part of the year depreciation. 
• Your question is how to split the depreciation
• Having said all of that, you will need to complete your father's portion of depreciation up to the date of the gift in order to input the correct accumulated depreciation.
• I am not certain that TT will be able to correctly handle the post gift part year depreciation.
• Hopefully one of the other responders will be able to advise on that.

[Carl]

This doesn't appear to be as simple as I may have been thinking. IRS Pub 527 page 8 at https://www.irs.gov/pub/irs-pdf/p527.pdf in the first column states:

Basis Other Than Cost
You can’t use cost as a basis for property that you received:
• In return for services you performed;
• In an exchange for other property;
• As a gift;
• From your spouse, or from your former
spouse as the result of a divorce; or
• As an inheritance.

If you received property in one of these ways, see Pub. 551 for information on how to figure your basis.

I go to IRS Pub 551 at https://www.irs.gov/pub/irs-pdf/p551.pdf page 9 and start reading from "Property received as a Gift".

Now I don't see anything for gift rental property or business property. So it appears that depreciation is not addressed. The way I read it, a new cost basis is established and the recipient of the gifted property starts all over with depreciation based on the newly established cost basis. I'm not 100% positive, but it would also appear that the process of figuring the new cost basis includes subtracting all prior depreciation already taken by the giver of the gift.

[tagteam]

Business property.

If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

See https://www.irs.gov/publications/p551#en_US_201812_publink1000257004

Essentially, everything carries over for this purpose with the exception of any passive loss carryovers (which are added to the basis of the property).

[Rick19744]

Actually this is not difficult, however, it may not be an easy result for TT:

• The basis of the gifted property is the lower of FMV at the date of the gift or the donor's adjusted basis.  In most cases, this means it is the donor's adjusted basis.
• While there are no MACRS regulations dealing specifically with this, old proposed regulations make this a step-into-the-shoes transaction.
• This essentially means you will continue on with the same depreciation method as your father.
• So once again, depreciation will need to be computed on your father's side up until the date of the gift.
• Then you will need to add the asset inputting your father's basis (taking into account bullet #1) and enter the accumulated depreciation up to that point; so his original cost basis and his accumulated depreciation.
• Based on that, I would think when you input the date of the gift for depreciation on your return, TT should compute this correctly.  
• Keep in mind, that you also step-into-the-shoes on any Section 1250 recapture upon a sale.