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Basically, show the property and each asset as converted to personal use one day before it was transferred to the estate. Depreciation will stop on that date you specify/enter. Selecting "YES" on the special handling required screen does not ask for any sales information, and it does not recapture any depreciation.
Then, when you enter the property on the estate return, the cost basis for that property on the estate return will be the FMV of the property on the date of her passing. (That's the "step-up" in basis). If the property will continued to be a rental (I don't see why it would not, even if the tenants moved out 4 days after her passing) the in service date is the date it was transferred to the estate, which means there is no prior year's depreciation to deal with. All that prior year's depreciation just "evaporates" on the step-up in basis.
What you might want to do on the estate return, is just report the sale in the Sale of Business Property section, so you don't have to deal with any depreciation at all.
@Hal_Al I know I'm good on the final 1040 return. But for the 1041 return is that doable? I know just enough about the 1041 estate return to be downright dangerous.
Thank you very much.
On the screen "Confirm Your Prior Depreciation", the amount of depreciation entered makes a difference in the tax liability so it seems like the depreciation is being recaptured on the return. My understanding is that the prior depreciation should not have any impact on this return. The amount entered in the prior depreciation field also impacts the amount of depreciation ascribed to 2020.
Any ideas how I can further check what is happening?
Regarding the 1041, that will be prepared by an accountant :). Unfortunately, she didn't have the bandwidth to take on the 1040 preparation, too. The property was sold soon after my mother's death and the accountant confirmed that the step up in basis would apply. thank you.
I assume you're working on her personal 1040 tax return. If that assumption is wrong, stop reading now so you don't waste your time.
On her personal tax return all you're doing is converting the property to personal use. There is "no" depreciation recapture. Now I'm curious as you why you're even being asked to confirm "anything" concerning depreciation. Was her 2019 tax return "not" done with TurboTax? If it was, did you "not" import the data from her .tax2019 file maybe?
If no to the above, then you've incorrectly entered information on the 2020 return concerning the rental property. To check yourself, you'll need to have a copy of 3 forms from her 2019 tax return. The documents you need are:
Two IRS Form 4562's for that specific property. They both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is "Alternative Minimum Tax Depreciation".
The third document you need from the 2019 tax return is the IRS Form 8582 which shows the passive carry over losses. Now due to changes in the tax laws in 2018 it's perfectly possible there will not be any carry over losses - thus the form 8582 will not be present in the 2019 tax return package.
Thank you very much.
Correct - I'm working on her 1040.
She prepared her 2019 taxes by hand so I'm starting from scratch as far as Turbo Tax is concerned.
Turbo Tax asked for the date the property was acquired and put into service as well as the cost of the property.
It's from this that the info on the "Prior Depreciation" screen is calculated.
The amount Turbo Tax estimated as prior depreciation is very close to actual (about $1K off).
When I changed the prior depreciation I noticed that the tax liability, as well as the current year depreciation, changed. Does that make sense? I wasn't expecting the prior depreciation to have any impact.
Prior depreciation needs to be correct. If you change it either way, it will affect the current year's depreciation, thus changing the tax liability.
The amount Turbo Tax estimated as prior depreciation is very close to actual (about $1K off)
Then it's perfectly possible the first year depreciation was figured incorrectly, or you're using the wrong "in service" date. For the rental property itself, that first year depreciation is figured using the mid-month convention. Remember, when dealing with the sale of rental property (which I realize you are not dealing with this on her 1040 tax return) you are required to recapture the depreciation taken, or "should" have taken. So if your in-service date is right, then the program has figured it correctly. If you need things to match, then you may need to change the in service date one or more months either side of the date you have. Now this would not be the proper thing to do, and the last thing you need as the administrator of the estate, is to get called on it by the IRS.
Typically, if the depreciation figured by the program is within a few bucks either side, then you're fine. Basically, anything less than $50 either side isn't going to make any difference in the tax liability.
Assuming you have the 2019 IRS Form 4562 titled "Depreciation and Amortization Report" for that one specific property, to get the 2020 prior years depreciation, on the 2019 form 4562 you add together the amounts in the "prior years depr" column and the "current year depr" column. That total is the amount of prior years depreciation that should be reflected in the 2020 tax return.
Thank you very much!!!
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