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How do I enter a change in cost basis and depreciation for a rental residence when one spouse dies (in community property state)?

Depreciation and cost basis need to "reset" because we're in a community property state.  Do I have to take the original property "out of service" and then place the same property "in service" at the time of the spouse's death? Or do I treat the house as a "new" asset starting at the time of death with a separate schedule E?

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Accepted Solutions
view2
New Member

How do I enter a change in cost basis and depreciation for a rental residence when one spouse dies (in community property state)?

 The accumulated depreciation on the rental property prior to the decedent's death is irrelevant. Once the property has been inherited, the depreciation schedule would begin based on the new fair market value.

Under IRC Section 2033, one-half of the value of community property at the date of earth is included in the gross estate of a deceased spouse, regardless of which spouse furnished the consideration used to purchase the property. However, under IRC Section 1014(b)(6), all of the community property acquired by the surviving spouse is treated as having been acquired from the deceased spouse if at least one-half of the community property is included in his or her deceased spouse’s estate. This is true even if an estate tax return isn’t required to be filed for the estate of the deceased spouse.

 Thus, the entire property receives a step-up in basis by operation of law based on its fair market value at the date of the decedent’s death. 

Take the property out of service on date of death. [enter DOD to stop depreciation 

At the property asset summary screen for your property; click edit  to the right of asset 

'Tell Us About This Rental Asset' [two screen for this information]

Then on the next screen after those entries continue

mark you sold

"This item was sold,retired,stolen ,destroyed,disposed of,converted to personal use,traded in ,or given away (or it is no longer used in this business for some other reason)

Then enter date of death  /retired from use.

continue on out  [do not enter any thing else]

Then add as a new residential rental FMV as DOD [separate land value, land is not depreciated]

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2 Replies
view2
New Member

How do I enter a change in cost basis and depreciation for a rental residence when one spouse dies (in community property state)?

 The accumulated depreciation on the rental property prior to the decedent's death is irrelevant. Once the property has been inherited, the depreciation schedule would begin based on the new fair market value.

Under IRC Section 2033, one-half of the value of community property at the date of earth is included in the gross estate of a deceased spouse, regardless of which spouse furnished the consideration used to purchase the property. However, under IRC Section 1014(b)(6), all of the community property acquired by the surviving spouse is treated as having been acquired from the deceased spouse if at least one-half of the community property is included in his or her deceased spouse’s estate. This is true even if an estate tax return isn’t required to be filed for the estate of the deceased spouse.

 Thus, the entire property receives a step-up in basis by operation of law based on its fair market value at the date of the decedent’s death. 

Take the property out of service on date of death. [enter DOD to stop depreciation 

At the property asset summary screen for your property; click edit  to the right of asset 

'Tell Us About This Rental Asset' [two screen for this information]

Then on the next screen after those entries continue

mark you sold

"This item was sold,retired,stolen ,destroyed,disposed of,converted to personal use,traded in ,or given away (or it is no longer used in this business for some other reason)

Then enter date of death  /retired from use.

continue on out  [do not enter any thing else]

Then add as a new residential rental FMV as DOD [separate land value, land is not depreciated]
ekullick
New Member

How do I enter a change in cost basis and depreciation for a rental residence when one spouse dies (in community property state)?

Thanks for the suggestion, but won't the re-entered asset with DOD FMV have the wrong acquisition date? If I use the correct acquisition date, the depreciation will begin prematurely on the new asset.

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