I owned a rental property with my mother in law 50/50 last year. In the middle of the year she gifted me the other 1/2. How do I make this adjustment in schedule E?

[Rwd123]

I own 100% title now and 100% loan in my name as we refinanced and did a quit claim into my name.

[Critter-3]

Aside from entering in 100% of the expenses you will ADD the other 1/2 of the property  in the asset section as a new property using the gifted basis for the cost.  

[Carl]

Just enter it in the assets/depreciation section *AS IF* it was a physically separate asset. Just keep in mind that the "gift" includes your MIL's original cost basis (which includes her share of any property improvements done since her original acquisition of her share), along with all of her prior depreciation taken and carry over losses.

For your cost basis, you will need to subtract the depreciation taken from the gifted cost basis, and that will be your "new" cost basis. Then depreciation starts over for the next 27.5 years on that asset, with 2020 being the first year of depreciation on that specific asset.

Your MIL will also need to file IRS Form 709-Gift Tax Return with the IRS. She will not pay any taxes on the gift. But she is required to report it if the value of the gift was more than $15K. (I'm sure it was.)

[tagteam]

Note that, per Section 469(j)(6)(A), the basis of the property gifted is increased by the amount of carryover losses (PALs). 

[Carl]

Ah okay.

So you use the giver's original cost basis (which includes the cost, or their share of the cost of any property improvements done during their ownership). To that you add the giver's carry over losses. Then from that total you subtract the giver's prior depreciation already taken. Does that sound about right?

[tagteam]

That is the special rule for gifts in Section 469:

(6) Special rule for gifts

In the case of a disposition of any interest in a passive activity by gift—

(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and

(B) such losses shall not be allowable as a deduction for any taxable year.

[Carl]

Thanks. That confirms it then. I myself rarely read the actual statutes because I usually find them rather drawn out, more so than the IRS Pubs already are. 🙂

[tagteam]

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@Carl wrote:

.....I myself rarely read the actual statutes because I usually find them rather drawn out, more so than the IRS Pubs already are. 🙂

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I understand but, unfortunately, the statutes comprise the actual law, along with the Regulations.

The Publications cannot even be cited as authority and have contained erroneous information in the past (for which the IRS is unapologetic).