Life estate to rental property

[Salparadise808]

Just before 2022, I was given a shed and two grain bins through a quitclaim deed that were on my property but previously set aside for another's use under a life estate arrangement.  For 2022, I rented the shed and bins out to a local farmer for his use.  I received a 1099-MISC for this rent at the end of the year.

Should these outbuildings be considered as an "Other" rental with the same address as my residence and acquired through "inheritance"?  Or perhaps through a "gift"?  Or should I consider the outbuildings as "other property" assets to be depreciated?  The latter option is more confusing, as I need to enter a fair market value under "Cost" to calculate the depreciation,  but I didn't pay anything for the outbuildings in the exchange.

If I am missing some details in this explanation that would help facilitate an answer, please let me know.

[tagteam]

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@Salparadise808 wrote:

If I am missing some details in this explanation that would help facilitate an answer, please let me know.

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One critical detail you missed was stating whether or not the life tenant passed or is still alive and that person simply quitclaimed the interest to you as the remainderman (so that you owned the entire property).

If the former is the case (i.e., the life tenant passed away), then you succeeded to sole and exclusive ownership of the property by operation of law and your basis for the assets is the fair market value on the date of death of the life tenant. 

[Salparadise808]

The life estate tenant (and his wife, who was also listed on the life estate contract) are both still living; they quitclaimed the property to me and the title work was changed so that I am now the "sole and exclusive" owner.

Does the conclusion of your second paragraph still hold, then?  And should I consider the outbuildings as assets therefore?

[tagteam · Accepted solution]

You have to calculate your basis in this scenario since the life tenants essentially gave you a gift of their interest.

In that event, you have a carryover basis for the value of the life tenancy relinquished (plus your basis as remainderman). You need to use the IRS actuarial tables to determine the value of the life estate.

See https://www.irs.gov/retirement-plans/actuarial-tables