How do I show step up in basis on commercial rental property? CPA showed me where to enter information on Form 4562, but I cannot seem to force the entries in Turbo Tax.

[geoff2]

Basis was stepped up during 2017.  I need to enter data on Form 4562 Part III line 17, and Part III line 19i.  Next year I will remove from service the former basis.

[Anita01]

You don't enter it as a new basis.  Rather you enter the step up as a new asset in the interview or on  anew Asset entry Worksheet for the property.  Just enter the additional basis and the description step due to ... and choose the same asset type as the original basis properrty.

[geoff2]

Thank you for the response.  I hit on that approach right after posting the question — good to know I was on the right track.  However, since the new depreciation is a proportional combination of that based on the old and new bases since the step up occurred during the year, I could not see a way to show on line 17 of Form 4562 the correct component of depreciation due to the original basis that was in effect for a portion of the year.  I ended up adjusting the basis on the original worksheet to achieve the correct value on line 17 of Form 4562.  Is there a better way to deal with the one-year transition in depreciation from one basis to another?  Next year will be easier since only the new basis will have been in effect.

[Anita01]

If you add the new asset, the depreciation for the existing asset would be in place for the entire year and the new asset only form the date placed in service.

[geoff2]

I'm not sure that I understand.  It's the same commercial property, with a step up in basis during the year.  If the depreciation based on the new basis is added to the depreciation based on the original basis after the date of the step up, it seems that the depreciation of the property for the year is greater than it should be.  Here is my understanding, which may be flawed, based on a hypothetical example: If the original annual depreciation was $100, and at mid-year the basis was stepped up such that the annual depreciation would be computed to be $200, then the effective depreciation of this single property would be $150 for the year.  Am I correct?

[Anita01]

your new asset contains only the additional step up amount, not he original basis plus the step up amount, so the original basis continues to be depreciate and the step up amount is depreciated from the date placed in service.

[Anita01]

In other words, you now have 2 assets for the same proeprty, one for the original commercial asset at original cost, and a second called step up from .... and that contains only the step up amount, not the total of both old basis and new.

[geoff2]

Thank you, TurboTaxAnita.  How would this be handled for my 2018 tax return?  Do I carry two assets into all future returns?

[Anita01]

Yes, it is very difficult to change an existing basis, but simple to add a new asset for the incremental basis. no reason not to carry it over to future years.

[connienelsontink]

is this the same method to use for step up of basis for rental property due to death of spouse? If the property were to be sold, will this method provide the information necessary to determine correct capital gain/loss for tax purposes?

[Anita01]

You don't enter it as a new basis.  Rather you enter the step up as a new asset in the interview or on  a new Asset entry Worksheet for the property.  Just enter the additional basis and the description "step up due to ..." and choose the same asset type as the original basis property.

[calmelson]

Thanks for the inquiry, Connie, as I am in the same boat since losing my husband on 12/31/2018.  This is my first tax filing as a widow due to his death being the last day of the year.  I have to step up the cost basis on my 2 rentals and am wondering how too do this exactly.  Turbo Tax wants a date placed into service, cost, land, prior depreciation, etc.....would my date be 1/1/2019 or the day after his death?  How do I know which assets to add to start depreciation over again?

[KrisD15]

Use the new fair market value of the rental including all assets. In other words, do not have individual assets for the appliances, group that with the house value. Therefore you should have a value for the land (not depreciatable) and the building. 

As stated below, dispose of the old rental and start anew. Use 12/31/2018 as the date placed into service. Do not recapture any prior depreciation for the inherited property. 

Original answer

"At the rental summary screen click the asset  update radio button to the right then edit on the asset summary screen and proceed to 'Tell us about this rental asset". check the block  "This item was sold .retired , etc " [Enter the date of death of decedent./or alternate date if applicable]  proceed on out..... NO OTHER ENTRY.

Stops depreciation..

According to Internal Revenue Code Section 1014, the tax basis of inherited property is generally the fair market value on the date of death, or the alternate valuation date if that value was used on the decedent's estate tax return.

In Revenue Ruling 63-223, the IRS stated that depreciation determined for the period after a decedent's death shall be computed using the fair market value as of the date of death or the fair market value on the alternate valuation date, as applicable.[land value is separated.. land is not depreciated]

 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.

You then start from the beginning and add a new rental property with a new basis on date placed in service as applicable."

[Carl]

is this the same method to use for step up of basis for rental property due to death of spouse?

Yes. Nothing what-so-ever is changed on the original asset entry. You just enter a new asset and give it a cost basis (cost and cost of land) that is equal to the amount of the stepped up basis. Depreciation starts on that newly entered asset on the "in service" date of that asset. The in service date is the date of the passing of the deceased. For residental rental property it's depreciated over 27.5 years. For commercial property it's 39 years. (Or 40 years, I never can remember which off the top of my head.)

If the property were to be sold, will this method provide the information necessary to determine correct capital gain/loss for tax purposes?

Yes. You will be reporting the sale of two assets, and you will have to split your sales price across both assets propertionately, so that the total sale price of each asset individually, is equal to your total sales price in the sales contract you will have with your buyer.

[bicichica]

Hello

I am very sorry to hear of the loss of your husband.

1) Use the date of death as your step up date. 

2) Get real estate appraisals for your rentals based on date of death.

3) Determine if your state is community or non community. This will be part of your calculation to determine your final step up basis. You can google search for examples of the math.

4) When and if you sell properties, capital gains or losses will be taxable and based upon rental sale amount minus the step up basis calculated at date of death.

Please Note: these steps are informational only and you should do independent research based on your particular situation. Good Luck And All The Best!