Deceased Owner Rental Disposition

[Tax113]

My father owned a rental property that I inherited in 2023 when he passed away. I will continue to rent it. Doing his partial year taxes, I don’t see where TT allows me to tell it when asset depreciation should stop. It only has cases for things like a sale, not a death. I’ve already told it the date of his death, but how do I get it to use that as the date of disposition due to death?

[Mike9241]

sorry for your loss. try entering as date sold the date of death but no other sales info

this will need to be done for each asset. 

do not check the box complete taxable disposition

[Tax113]

Thank you. Next questions:

I inherited the rental and have continued renting it. When I entered the date of death as the "Stop" date, it looks like TT accelerated the depreciation on some of the assets. For example, a new furnace was installed August, 2022. August to December is 5 months. The total depreciation for that asset for 2022 taxes was $1950, so $390/mo for 5 months.

However, my father passed away on Feb 1 of 2023, but TT calculated the depreciation to be $1560, just for that one month. Comparing the $390/mo to the $1560 seems like something is wrong. My only guess is that it accelerated the depreciation somehow.

Questions:

1. Does the $1560 vs $390 make sense?

2. Now that I've inherited the property, how do I begin depreciating the asset myself on my own taxes, given that some of it has already been depreciated?

Complication: The property was in a trust with just myself and both my parents. I am filing 3 returns for this:

1. Father's return from 1/1/2023 until date of death

2. Date of death until property transferred to me - 1041 for those 3 months.

3. My own taxes after transferred from his trust to me.

More questions:

1. Given the trust complication, I'm now wondering if the "Stop" date is the date of death, or rather the date transferred to me?

2. How do I instruct TT to treat the depreciation for each of these 3 cases?

[DianeW777]

The inherited property has a new value for you because the day you inherited it, the cost basis for you became the fair market value (FMV) on the date of death.  You would start a rental activity for yourself with with the FMV or other value determined on any inheritance documents.

Stop date is the date of death.

Your Tax Return:  For you, based on the inheritance rules, they will all be new assets to you with a FMV as cost on the date of death. You will treat them like there was never any depreciation or use as a rental on a tax return before you.

1. In your tax return you would not enter any date of sale or disposition.  This will move directly from the trust to you and should all be reported on your tax return, not the trust.
2. Enter each asset on your tax return as though you began operating a rental on the day after your father's death.
3. Use the FMV on the date of death as the cost basis with the following day as your first day to rent the property.
4. Be sure to separate out cost of land and building, you will be asked for both.
5. Enter any other assets that you received with the rental property that will be used for the rental property.  Again, using the FMV on the date of death as your cost basis.
6. Your depreciation will take the appropriate amounts based on the date placed in service on your return. 

Father's Tax Return: (Sending my sympathies)

1. Select the property was disposed of.
2. For each asset use the date of death as the date removed from service.
3. Use the same date as the sales date if necessary and then be sure to select special handling.  Once this is done the only thing on your father's return should be any rental income or expense through the date of death including partial depreciation.  There will be no sale or other documents included with the return.  They are simply removed from service and that is the final return for your father.

Trust Return:

1. The property is transferred to you basically immediately.  It's just passing through the estate to the beneficiary.  Any activity for the rental property should go directly to you and reported by you.  The trust return may have interest or some other income and expense, all of which will likely be distributed to your on a K-1. 
2. Based on your comments you inherited the rental property and all my answers are directed that way. It's unclear if your mother is still part of this process - 'The property was in a trust with just myself and both my parents'.  If she was part owner there could be more complications in regards to the answers above.
   1. Is she still living?
   2. Is she part owner?
   3. Did you receiver her portion as a gift?

@Tax113 

[Tax113]

Thanks for the detailed answer. I’m surprised that no rental income should go to the 1041 given the property didn’t transfer from the (revocable) trust to me until 3 months after the date of death. I get that I am the sole survivor from the trust (yes, my mother was already deceased before my father), but the deed didn’t transfer to me directly until after those 3 months. 

[Carl]

I'm not going to even try with the 1041, as my knowledge of the rules for that is just to limited.
But for you on your personal 1040 tax return, the cost basis of the property is whatever the FMV of the property was on the date of the original owner's passing. Then using that new cost basis, depreciation starts over from year 1.
Typically, the "in service" date for you would be the date the property was titled to your name. But that's not a hard fast rule as I understand it. I could be the date you actually started collecting the rent in your name, even if before the property was actually titled to you.

I also understand that all prior depreciation taken by the original owner, "evaporates" upon their passing, with no exceptions I'm aware of.
Now I can't speak for the 1041, but for the deceased final 1040, you don't report a sale, because no sale took place. For each asset as you work it through the assets/depreciation section, you select YES on the "Special Handling Required?" screen. That will "dispose" of the property as of whatever date you specify, and will not ask for any sales information; as it shouldn't since nothing was actually sold.
Things might be different since the property passed to an estate before it was passed to you.

[Tax113]

Thank you! Very helpful. 

[Anonymous_]

@Tax113 

Without being able to read the terms of the trust and without knowing the parties involved, and their relationship to the trust and the other parties (e.g., who was/were the grantor/grantors, who was/were the trustee/trustees, who was/were the beneficiary/beneficiaries), the answers you have read here thus far could be 100% incorrect. 

You can start by answering the questions posed by @DianeW777 in her post above.