Handling of Depreciation

[Gmoney49]

My mother has owed a rental property since 2005 and has taken depreciation over those years on her personal schedule E.  I was recently added to the deed and we sold the house in 2023 in a like kind exchange.  Several questions -1. the rental income remains in her name.  Do I need to report the income and expenses.  Answering the question about ownership in schedule E, she is now 50% owner and cuts all expenses in 1/2.  I assume I need to report the income and expenses.  2 - How do I deal with the deprecation if I have to report 1/2 of the income and expenses.  She normally would deduct $8500 in deprecation and when I adjusted the cost for the 50% ownership, it reduced her deduction down to $2200, well less than 1/2.  Can she claim the full deprecation on her return and 1/2 the other expenses.  This would benefit her more than me.

[KrisD15]

No, she would claim all or half, not a combination.

This could potentially be a very complicated situation. 

HOW you were added to the deed would make a difference. If simply as a Remainderman on a Life Estate, everything would carry-on as if nothing happened, your mother would continue to claim the rental as her own.

If half the property was TRANSFERRED (gifted) to your ownership, you would take the adjusted basis in the property. which would be your mothers original basis less depreciation. 

If you are asking about the original rental, and she transferred half to you, in TurboTax she would need to claim half of everything, income, expenses and depreciation, for the time she only owned half. In order to "report" the 1031 exchange, in TurboTax she would indicate that she converted it to personal use so that the depreciation recapture and capital gain is deferred. You would claim the other half if you were half owner.

If this was the property that was involved in a 1031, consult with the Exchange Facilitator and perhaps a local real estate attorney.  I assume you and your mother now each own half of a new rental in which case you will each set-up a schedule E for your respective halves of the new rental property. 

If there was "Boot" involved, you would each claim half. 

Again, this is a bit complicated because real estate is governed by state law, and a 1031 exchange can have different tax ramifications. Additionally, you and your mother need to record the capital gain and depreciation recapture you each need to someday claim. If property is inherited, which would be the case of a Life Estate, Depreciation and Capital Gain is not carried forward with the new basis. If property is gifted, they are. 

[Gmoney49]

You are correct.  My parents (Father passed away several years ago) added me to the deed to ensure the home would transfer to me upon their passing.  It was not gifted, nor ownership transferred, they simply added my name to the deed.  When we sold the house, both my mother and I received a 1099-s for 1/2 of the sale price each.

Sounds like we would keep the rental activity on my mothers schedule E 100% since the property was not gifted and I was not a principal partner in the rental activity, everything was controlled and managed by my mother. 

We both then would claim the like kind at 1/2 of the sale of the home but my mother would carry and report  the deprecation recapture on her return.  I would just report 1/2 of the sale price.  Not sure what to use for my basis.  I am assuming 1/2 of the basis of the home not including any depreciation as the deprecation would be reported on my mothers return.

Thanks

Does that sound correct?

[DianeW777]

You should split the property and any assets equally in 2023 since your name was added to the property.  The property retains the same character in your hands as it did in hers, specifically cost basis of all assets and prior depreciation.  The rental house would continue on your return as though you were always on the deed due to the gift (not inherited).

You can choose to leave it on her tax return, then the sale proceeds given to you would be the gift.

Whether she reports the full sale and retains the property on her tax return or whether you split everything in half it would seem a gift tax return must be filed.

1. File a gift tax return when the house was deeded half to you, OR
2. file a gift tax return when your mother gave you half of the sale proceeds.
   1. The 2023 gift tax limit was $17,000, gift tax exemption is $12.92 million in 2023 (no gift tax would be required, but a return is required).

Note: Your cost basis in the property is as stated by @KrisD15 - The property was gifted to you simply by putting your name on the deed.

• If half the property was TRANSFERRED (gifted) to your ownership, you would take the adjusted basis in the property. which would be your mothers original basis less depreciation. 

@Gmoney49