How to report sale of rental house with stepped up basis and remove prior deprieciaion after death of spouse

[view2 · Accepted solution]

Depends on your individual circumstances that would effect the tax reporting.

If the property  is held as community property, the entire interest in the house gets a step in basis to the current FMV.

 If the property is held “with rights of survivorship” then the house passes immediately to the survivor which in turn inherits the new stepped up (or down) basis of the decedent to add to his or her own basis-in the case of joint tenancy or tenancy in common, 

State laws dictates your stepped up basis ,Federal law dictates the taxes on sale.

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.

There are many rules that could affect you,it is always best to seek competent CPA's advice as  your tax situation will have  unique circumstances that applies only to you.

If reported as a rental in Turbotax you would take the property out of service on date of death. Then recompute the adjusted basis in accordance with state laws and then enter the sale in Turbotax with the proper calculated basis.

[bicichica]

What date should be used when reporting sale of stepped up rental property?? The original 2005 purchase date or the 2017 stepped up date? When calculating depreciation amount, Is it based on original purchase date or the stepped up date?

[DawnC · Accepted solution]

The sale date is the date you sold the property.  A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.   The higher market value of the asset at the time of inheritance is considered for tax purposes.  When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it.

The asset receives a step-up in basis so that the beneficiary's capital gains tax is minimized. A step-up in basis is applied to the cost basis of property transferred at the date of the death. 

@bicichica 

[Anonymous · Accepted solution]

you use the date you inherited the property which should generally be the same as the death of the person you inherited it from.   any depreciation taken by the former owner vanishes for tax purposes upon death. the inherited property should have been depreciated based on the date of death value.  that is depreciation is subject to recapture. 

[Carl]

For starters, the acquisition/purchase date is the date you inherited it, which is commonly the day your name was put on the deed.  As for the prior depreciation, there is no prior depreciation to deal with from before you inherited it. That prior depreciation basically just "disappears and evaporates" for you, as if it never existed.

Now do make absolutely certain that you select the option to indicate you acquired the property by inheriting it. That will insure any gain on the sale is treated as a long term gain, even if you owned the property less than a year. But commonly, when inherited property is sold within a few months of inheriting it, it's not uncommon for the sale price and the FMV of the property to be the same - meaning no gain or loss on the sale. Therefore, no tax consequences.

Now, if the home was not rented between the time you inherited it, and the closing date of your sale, then is *NOT* a sale of rental property. If "you" had no business use of the property in any way, shape, form or fashion, then you report it as the sale of a second home. You'll start in the Investments section and elect to start/update Stocks, Bonds, Mutual Funds, Other and just work it through.

If you *did* rent this property out after you inherited it, then you will report the sale in the Rental and Royalties Income (SCH E) section of the program.

[rdr390]

If the sale date is the date of death and the sale occurs say 6 months later, how is that sale then a capital gain versus an ordinary gain?

[JohnB5677]

There is an alternative valuation rule which can be adopted. This alternative valuation gives the taxpayer the election to value the property six months after the date of death or at the date of disposition, if earlier.

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[TurbUser102x]

Dawn - I am reading this old thread as it applies to me today and for amending some erroneous returns in the past.  Our family forgot to get the stepped up basis for my mother when my father died on the rental properties they were joint owners on.   Questions are:

1. Do you leave the original "asset" for the rental in the asset summary alone?  You only enter in the sale price and date it sold when/if the asset is sold?  If so, do you put the full sale price?

2. When you enter the New Asset for the rental property in the asset summary do you put the new basis in as the sum of 1/2 original basis + 1/2 FMV at DoD? (This is spouse situation like mentioned, so 50% stepped up basis).  I also understand the service date will be DoD.  When property is sold, do you just put in the full sale price and expenses?

I guess my question is mainly around whether or not you put in the full values for new asset instead of trying to make the old asset 1/2 of the value it was and the new asset 1/2 of the FMV and then put sale price in as 1/2 of price for each when listing sale.  All the threads on TT on this topic seem to show different methods.  

If I want to start a new asset with stepped up basis for rental property that a spouse gets a 1/2 stepped up basis based on FMV for, how do I do it?  What do I do with the original asset?  What do I do with the new asset?  And what do I put in for the sale of the property for both listed assets for depreciation?  

Appreciate your help if possible!

[MarilynG1]

You could mark the Original Asset as 'converted to Personal Use' as of the DOD.

Then enter the New Asset with the stepped-up Cost Basis as of DOD (and also as 'Date Placed in Service') and continue claiming Rental Income/Expenses/Depreciation on the new asset. 

Click this link for more info on Rental Property Stepped Up Cost Basis. 

[TurbUser102x]

But when you convert the original asset to personal use on Date of Death, does it make you recapture all the depreciation?  I have other rentals that I need to do this on that are not sold.  So do you just do this for all of them regardless? Just take them out of service on DoD and do nothing else?

[TurbUser102x]

fyi - I tried to "take it out of service" on the date of death, but it does not work correctly.  You have to put in the date of sale in the current tax year or it screws up...

[DaveF1006]

Yes. Take it out of service as of the date you sold or disposed of it, which is this year. You wouldn't use the date of death

[happyDonate]

Hi,

Parents and their adult child hold the rental as joint tenants.

1) After husband passed, does the rental get full  Fair Market Value(FMV), or 1/3 of the FMV for the new depreciation basis?  If wife and her adult child file tax separately, should each one has 50% of the new depreciation basis?

2) Wife passed few year later, does the rental get full FMV or 1/2 of the FMV for the new depreciation basis?

Thanks.