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Lani75
Level 2

How do I enter prior depreciation on an inherited rental property?

I inherited my rental property and my accountant told me I have to enter prior depreciation paid by my mother. How do I do that in Turbotax? When I enter information in the assets section there is nowhere to enter prior depreciation. I am guessing that's because I only entered the property into service on this year's tax return so TT thinks I shouldn't have any prior depreciation.

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Accepted Solutions
Critter
Level 15

How do I enter prior depreciation on an inherited rental property?

Now things are clearer and the accountant should have given you better instructions ... first since dad was a co owner of the property so  when he passed mom should have gotten a stepped up basis  and the depreciation basis  adjusted at that time.  Then later she gifted half to you (hopefully she also filed a gift tax return) so you need to know the gifted basis so you can start your depreciation using the correct basis.  I would talk to the accountant and get the correct info you need to proceed or use them to complete the tax return as this is not a straight forward situation to enter in the TT program. 

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7 Replies
Critter
Level 15

How do I enter prior depreciation on an inherited rental property?

Ok ... your accountant is wrong ... when you inherit a property the basis is stepped up to the current fair market value as of date of death and your depreciation starts fresh using that figure and the date you inherited it  ... her prior year basis or depreciation is immaterial.  

tagteam
Level 15

How do I enter prior depreciation on an inherited rental property?

@Critter is correct; your accountant is just wrong on that score. 

 

On a side note, did anyone file a final return for your mother?

Carl
Level 15

How do I enter prior depreciation on an inherited rental property?

Apparently your accountant, while they may know how to manage money, obviously doesn't know anything about taxes. I suggest you fire them and if you really need an accountant, seek out a new one. Any "accountant" telling you what you've been told just didn't pay attention in accountant school and there's no telling what else they may have screwed up in your financial life. This is basic stuff, like when you learned your A B C's. While not all accountants are CPAs that attended "tax school", this is such basic information there's no excuse for any and every accountant to not know this.

When you inherit rental property everything is reset to zero for you, the one that inherited it.

Your cost-basis of the property is the fair market value (FMV) of the property on the date the person you inherited it from, passed away.... not the date you got control of it. Take note that you can *NOT* use property tax records to determine FMV either, because traditionally the tax value of the property will be 30% or more below the FMV of the property.

Now I assume you are retaining this property as rental property and will continue to lease it out. If so, you will have more questions. To help save you time I'm providing you the below, as it will answer a vast majority of those questions for you.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER  you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

Lani75
Level 2

How do I enter prior depreciation on an inherited rental property?

I should clarify. My mother is still alive. She inherited the property from my dad who died in 2017. In 2018 she GIFTED it to me which is different. That's why my accountant advised we have to go from the basis on the date of my father's death and then declare  half of the depreciation she paid last year.

rjayne
New Member

How do I enter prior depreciation on an inherited rental property?

You should be able to switch to Forms, find the depreciation schedule and manually enter prior depreciation...if that's what you decide to do.

Critter
Level 15

How do I enter prior depreciation on an inherited rental property?

Now things are clearer and the accountant should have given you better instructions ... first since dad was a co owner of the property so  when he passed mom should have gotten a stepped up basis  and the depreciation basis  adjusted at that time.  Then later she gifted half to you (hopefully she also filed a gift tax return) so you need to know the gifted basis so you can start your depreciation using the correct basis.  I would talk to the accountant and get the correct info you need to proceed or use them to complete the tax return as this is not a straight forward situation to enter in the TT program. 

View solution in original post

Lani75
Level 2

How do I enter prior depreciation on an inherited rental property?

Thanks. I did end up doing that and Turbotax hated it. Gave me errors every single time I reviewed the return and then did not allow me to file electronically. So I mailed it in. I appreciate all the advice, though.

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