Depreciation on gifted rental property

[pingguo38]

In April 2021 I was gifted a rental property from my parents. My understanding is that for calculating depreciation I can continue to use the cost basis/service date/prior depreciation from previous years. But my question is what happens with the 2021 tax year specifically since I only owned the property for 9 months of the year. Do I depreciate 75% of the amount that I would have depreciated if I owned the property the entire year? And then my parents would depreciate 25% of the amount?

[pk · Accepted solution]

@pingguo38 , assuming that you are all US persons ( citizen/Green Card/ Resident for tax purposes), 

1. the depreciation  schedule for the property continues as if it was with the original owner ( because in case of a gift, the donee's basis is the same as the donor's basis at the time of the gift ).  The claiming of the depreciation is generally based on the number of days owned by each -- donor and the donee/ recipient.

2. Absent and contravening facts, it may be easier to work as if the property was transferred on 01/01/2021  ( including rental income , expenses etc. ) --- it is cleaner  and as  long there is no double binning , there is no issue.

3. If the property is renting at a loss  ( after accounting for depreciation), then the passive loss limitation may come into play and there  could be a windfall advantage to one party ( based on the claimed transfer of ownership date ) -- IRS would object to that, if and only if the facts are diff.

Does this help?  Is there more I can do for you ?

pk

[pingguo38]

Thanks, this answers my question. Treating the property as being transferred 1/1/2021 is not an option for our situation, but we will assign the percentage of depreciation based on the days owned.

[Danny782]

Hi @pk ,

Thank you for your explanation. I have a similar situation as @pingguo38 where the transfer of the rental property (gift) occurred on April 2022. However, I am having trouble allocating the annual 2022's depreciation between the donor and myself in Turbotax.

The donor will be taking depreciation through April 2022 and I'll be taking depreciation from May 2022 - December 2022 but when I put in my donor's historical placed in service date (continues as if it was with the original owner), Turbotax automatically calculates the full year's depreciation amount. I am not able to change the full year depreciation amount to the pro-rata amount. Do you have any insights on how to enter it into TurboTax so it calculates the pro-rata amount? Thank you!

[pk]

@Danny782 , there may be other ways to achieve this  but my preferred way would be the following:

1. The donor completes  his return claiming the transfer / sale of the property  as of 04/01/2022.   He sells it at his adjusted basis  and thus there is no gain / loss for him.  He is also then able to give you his accumulated depreciation, his adjusted cost basis etc.

2. Then you prepare your return  with anew property acquired  by "gift".  This will allow TurboTax to ask for Donor's adjusted cost basis, Donor's accumulated depreciation as of 04/01/2022.  Now it should allow you to continue the depreciation for the rest of the year and into future without any hastle.

This allows for clean break but continues the  depreciation schedule and  adjusted cost basis of the donor.

Hope this helps.  However, if you see things  are not working as you expect, please consider writing back but give me some figures so I can duplicate the return ---- no Personally Identifiable Information  please .

pk

[Danny782]

Thanks PK!

[GeorgeM777]

There is a better way but you will need to upgrade to TurboTax Home & Business.  After selecting TurboTax Home & Business, about a dozen screens into the Property Profile section (which accessed by selecting Business Income & Expenses, and then Rental Properties and Royalties) you will see the screen, How Did You Acquire the Property? and on this screen you will also see the option to select I received this rental as a gift.  The next screen will request information about, among other things, the date the donor placed the rental in service, donor's depreciation schedule, and donor's gift tax, if any.  

If you are interested in upgrading to TurboTax Home & Business (which is available as a CD/download) here is a link to a TurboTax article that describes the process.  You won't have to re-enter your information, as your online information will transfer once the upgrade is complete. 

How do I switch from TurboTax Online to TurboTax CD/Download?

@Danny782