Entered rental property sale that resulted in NY tax, but did not effect Federal

[sbavc]

Hi,

I co-own a rental property that was sold in 2020 for a profit. However, I've never reported any of the rentals (was always reported by my brother who own the other half). After converting the 2019 tax into Turbotax 2020, the first thing I did was enter the sale of the rental property under BUSINESS (I have the Home & Business version for Mac). The sale is the only business income I have. This resulted in a tax owe for NY state, however nothing (owe or refund) for Federal. Can someone shed some light on why?

Thanks

[Carl]

I am of no help with state taxes. Maybe this will help you figure it out.

I assume your brother reported the sale of his half. Since your brother is the one who reported all the rental income/expenses in the past, did your brother also recapture all the depreciation he took? Since you did not report anything on this property on SCH E in any year, you would have no depreciation to recapture. Your brother would be required to recapture it all and pay taxes on that recaptured depreciation.

With the addition of state taxes, I have no doubt this complicates things more than even I can imagine.

[sbavc]

Hi Carl,

The situation is indeed complicated. The property was originally owned by 3 people (my sister, brother, myself). The rental income was always reported by my sister and brother, as such so was the depreciation. Unfortunately,  my sister has since passed. As a result of selling the home for a profit, I received a 1099S (along with my brother). As you mentioned, since I have never reported this property, I've taken no depreciation. How should I report this sale on my Federal tax?

Thanks

[Carl]

Does the 1099-S include the "entire" proceeds from the sale? Or only your share of the proceeds? I am also assuming that it's your SSN on the 1099-S.

Also, understand the 1099-S shows the proceeds paid out at the closing, and does not always include the entire gain. For example, if some of the gain from the sale was used to pay off an existing mortgage, the payout funds are not always included on the 1099-S. But the payoff is still reportable gain.

The fact that you received a 1099-S with your SSN on it means that you are required to report this sale, no matter what.

This is not simple, and since depreciation recapture is required here, I'm honestly not sure how to handle this. Since you are not the one who took the depreciation, it is not correct for you to recapture it. Add to that, you're dealing with a state return, then add to that it's a NY state return. I would prefer to bow out at this point and let another deal with it. Preferably someone from NY or someone more familiar with NY state taxes.

[sbavc]

The 1099S only has my portioned the sale.

Thanks for trying. Hopefully someone else has the answers.

[Carl]

On the federal side it should be fairly simple I would think. Since the 1099-S only has your 50% of the proceeds. that actually simplifies things a bit. You report the sale in the Investments section using 50% of the FMV on the original owner's date of passing as your cost basis. Since it's inherited property make sure you specify that so any gain realized is taxed as a long term gain, and not as a short term gain.

[M-MTax]

Except 50% of the FMV on the original owner's date of passing would not be @sbavc's cost basis because @sbavc only inherited or succeeded to the sister's share...... @sbavc said the property was originally owned by @sbavc  and a brother and a sister....each presumably owning 1/3. So, the step up in basis would apply only to the 1/3 that was inherited.

[Carl]

Like I said in an earlier post, this is not simple. That's why I prefer to leave it for someone more knowledgeable in the matter.- particularly when it comes to NY state taxes.

[sbavc]

You are absolutely right. I only inherited 50% of the 1/3 ownership from my sister. My brother inherited the other 50%.

[M-MTax · Accepted solution]

Like I said in an earlier post, this is not simple. 

You said the federal side should be simple and I agree. It's just that the basis you posted was not right because @sbavc didn't inherit a full 1/2 share.

[sbavc]

Yeah, I realize this is very complicated and it's not cut and dry. In situation where you guys hit difficult complicated issues/questions, does IRS provide guidance?

[Carl]

@M-MTax seems to have a better grasp on your situation than I do. So I'd go with the information he's already provided you above, which states that your step up in basis is only on the 1/2 of your sister's part that became yours prior to the sale.

[sbavc]

So I have to calculate my basis using the following:

My original 1/3 share cost + my inherited 50% of 1/3 share @ FMV at the time of her passing

Is the above formula for my basis right?

[M-MTax]

@sbavc YES! You have a split basis......your cost which is what you paid for your 1/3 plus the 50% share of the 1/3 you inherited.....so that's 1/6 of the FMV you would add to your cost basis.

[sbavc]

Got it, thanks!