Inherited an occupied rental property.

[LJ1188]

So my father passed away in Nov of 21 creating an estate. He had no will, an estate attorney handled the estate  tax return. HR block did the 2021 1040(agent my parents had used for 20+ years). I did the 2022 1041 as a first/last with turbo tax business.

I was the sole beneficiary and executor of the estate, I thought I had read when the estate closes I would just be able to treat the income as personal income for my next 1040 with the schedule E.

Probate ended 3/24/23, the estate attorney said I didn't have to transfer the deed because I was the sole beneficiary and executor, but I requested the deed to be put in my name which went through on 6/28/23.

So first, did I make a mistake with the 1041 listing it as the final year because probate ended in March of 23?

If so, does this mean I need to amend the 2022 1041?

If so, does this mean I need to file a 1041 for the first 3 months of 2023?

Doing my 2023 returns with turbo tax I am a little lost on the "Situation's" does it count at first year rented for me, if the existing tenants have been there 10-15 years?

If it does count as first year rented, what would be the in-service date 1/1/23 or 3/24/23 or 6/28/23?

I know there is even more with trying to figure out depreciating the asset, but I haven't even got that far yet.

[tagteam]

Was there a 706 filed by the attorney? That could be important if the attorney used a alternate valuation date.

Otherwise, the property would be depreciated based upon its fair market value on the date your father passed away. Prior depreciation deductions would disappear, and depreciation would begin in November of 2021 with the new (FMV) basis and recovery period (27.5 years).

If the estate was not terminated, then it appears as if you did not err (assuming the correct basis and recovery period were used on prior returns).

[LJ1188]

I don't believe there was a 706 filed. The estate was less then 2 million, so it was not subject to federal estate tax, just Massachusetts estate tax.

On the 1041 I am realizing there may have been mistakes.

On the 4562 for the 1041, the in service date is 11/19/21 with a 27.5 SL/MM.

I believe TT business calculated prior depreciation based on the FMV and the remainder of 2021 that the estate owned the property.

So then it prompted me for prior depreciation with a value I didn't understand at the time and used the MACRS depreciation value from the 2021 4562.

Which looks like it's now giving me an incorrect K-1.

Would the proper way to fix this be amending the 2021 1040, filing a 2021 1041 and amending the 2022 1041?

Also since the estate closed in 2023 do I need to file a 2023 1041, or do I just claim all of the 2023 income on my personal schedule E?

[tagteam]

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@LJ1188 wrote:

On the 4562 for the 1041, the in service date is 11/19/21 with a 27.5 SL/MM.

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Start at that point because it sounds correct with the new recovery period and, presumably, the new basis (FMV on the date of death). 

What is the issue going forward from that point? You would get the carryover basis from that 1041.

[LJ1188]

I am just trying to verify if I made a mistake or not as I claimed attorney/appraisal fee's on the 1041 schedule E. The expense's/depreciation exceeded the income of the rental property, giving me a NOL on my K1.

I just don't want to carryover an incorrect NOL.

[tagteam]

It would not be an NOL, but a passive loss carryover (as a result of the depreciation deduction). 

Since the property was distributed to you in kind, you would add that PAL to the basis in the underlying property (PALs cannot be distributed to beneficiaries on final returns).

You also might want to consult with a local tax professional since there could be state tax issues involved here.

[LJ1188]

I realize I probably need a tax professional. I just like to try and understand/figure out as much as I can due to trust issues stemming from my personal profession seeing coworkers clearly unqualified to perform their jobs.

[tagteam]

Well, a loss as a result of a sale of the rental property could generate an NOL.

Deductions for expenses (including depreciation) would result in a PAL.

[LJ1188]

I think I realize where I went wrong, so the estate didn't require a federal 706, but it did require the Massachusetts 706.

I think the Attorney, Appraisal and HR block expenses went on the  M-706. But I don't believe I have a copy of the M-706 as the attorney's office did it digitally through mass tax connect and I don't think they ever sent me a copy of it.

So I didn't even know what a m-706 was until just now. So when I was doing the 1041 with TTB I put the HR block fee's on 1041 15b and the attorney/appraisal fee's on schedule E line 10. So I think I accidentally double dipped and will need to amend the 1041.