My wife died in 2022. In Turbotax, how can I Step Up the cost base of our rental property to get more depreciation? Can I update the original Cost to reflect the Step Up?

[happyDonate]

Hi Carl,

in 2/5/2023 5:36pm Ming's post mentioned (fair market value - original purchase cost).

in 2/5/2023 6:32am your post "if the property is in a community property state,  the property will get 100% step up. If Ming's property in CA (a community property state), then no need to split the asset because the property will get 100% fair market value, previous depreciation evaporated, depreciation will use 100% fair market value as new depreciation basis? If mother and an adult child on the property as joint tenants in CA, can they use 100% fair market value?  Because mother and child on the joint tenants, when mother passed, the child inherited the property as a whole.

[ming3]

@happyDonate, @tagteam, @Carl , @AmeliesUncle 

Actually, in Feb, we agreed that AmeliesUncle's method is the best one, and that is the method I actually used (See my post of February 6, 2023 12:27 PM).

So, there is no more like:  (Fair Market Value - Original Purchase Cost).

[happyDonate]

Hi All,

When I searched answers for my questions. I ran into this case.

Does anyone know if parents and a child took rental property in joint tenants in a community property state, does Husband(H) and Wife(W) get 2/3 and child(C) gets 1/3 or everyone gets 1/3?

Thanks

[Tzoto]

Re: my husband died in Apr 2022. We have a primary home and a rental property in New Jersey ( joint tenancy state). I got the properties appraised at his death and I would like to know how can I amend the 2022 tax returns to reflect the step up basis for both properties (Primary and Rental).  I am reading confusing suggestions (some are saying to report the rental as converted for personal use on DOD and add as new rental with  step up basis on the same date; some are saying to report as sold on DOD and add as new rental with step up basis on the same date.  Thank you.

[Carl]

All you have to do is enter the stepped up basis as a completely separate asset. For example, if current basis being used for depreciation is say, $200,000 with $50,000 allocated to the land, that means your depreciation basis is $150,000.
If the new basis is say, $400,000 after his passing, then keeping percentages the same that would be $300,000 for the structure and $100,000 for the land. The difference is what you would enter as a completely new asset with an "in service" date the date of his passing. So that would be a new asset with a $200,000 cost basis and $100,000 allocated to the land.
In some states you only get to step up the share of the deceased. That means you'd enter your your new  asset using half of the values above.

[Tzoto]

Hi TagTeam,

Thank you for your response.  A couple of days ago I came across the thread that you mentioned (AmeliasUncle) and while I understand the concept, would you please clarify:

a. when you say original basis, do you mean the purchase price + closing cost at purchase + any improvement done till the date of death? Should I exclude the cost of land?

b.  when I set up a new asset, would turbo tax prompt me to enter depreciation? so that I can enter 50% "prior depreciation" for nr. 1 and nr. 2?

c. For nr. 3. can you please confirm that should be 50% of Fair Market Value?  

I live in NJ ( joint tenancy state) and I get only half of the step up basis.  (my half does not change and I add half of the FMV to that to get the new total base).

My other question: Because I will need to amend the 2022 tax returns to fix all these, how do I divide income/expenses for 2022 among all the three new assets that I will create?

Thank you very much.

[AmeliesUncle]

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@Tzoto wrote:

a. when you say original basis, do you mean the purchase price + closing cost at purchase + any improvement done till the date of death? Should I exclude the cost of land?

b.  when I set up a new asset, would turbo tax prompt me to enter depreciation? so that I can enter 50% "prior depreciation" for nr. 1 and nr. 2?

c. For nr. 3. can you please confirm that should be 50% of Fair Market Value?  

My other question: Because I will need to amend the 2022 tax returns to fix all these, how do I divide income/expenses for 2022 among all the three new assets that I will create?

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a)  It is usually the purchase price plus closing costs.  Improvements should have been depreciated separately.  The program will ask for the total cost (building plus land), and it will also ask for the land cost.

b) Yes, it should ask you for prior depreciation.  It might default to showing blank (so it might not be a 'required' field), but it should have a spot to enter it.

c) Yes.

You don't need to divide income and expenses.  All of the assets for depreciation are under the same rental property.  So you will still show ONE rental property, but it will have multiple assets for depreciation.

[Tzoto]

Thank you so much AmeliesUncle,

Your instructions were so clear and I entered everything in TT as you advised. 

I have two questions:

1. When I sell the rental property, am I correct to assume that Turbo tax will calculate properly the tax on the gain including recapturing depreciation in the two assets (my old half and my husband 1/2 stepped up) when I report the Property as sold?

2. Do I need to do anything regarding stepped up basis on my Primary Residence?  If  yes, how do I report it in TT?  If not now, how do I deal with it when I sell it?  I dont plan to sell it for quite some time, but I am afraid that by the time I sell it, I will be over the $250K tax exclusion.

Thank you so much.

[AmeliesUncle]

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@Tzoto wrote:

1. When I sell the rental property, am I correct to assume that Turbo tax will calculate properly the tax on the gain including recapturing depreciation in the two assets (my old half and my husband 1/2 stepped up) when I report the Property as sold?

2. Do I need to do anything regarding stepped up basis on my Primary Residence?  If  yes, how do I report it in TT?  If not now, how do I deal with it when I sell it?  I dont plan to sell it for quite some time, but I am afraid that by the time I sell it, I will be over the $250K tax exclusion.

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1)  Yes ... but it won't be particularly easy.   You would need to either (a) allocate the sales price between the various assets, or (2) report it in a different section of the program.  Neither walks you through it like most of the rest of TurboTax does.   You can definatly do it, but it might be a situation that you might consider a tax professional.

2)  No you don't need to do anything in TurboTax in regards to your personal residence.  However, make sure you keep a permeant record of "step up" value for when it is sold.  An official "appraisal" is the best option.

[PADenny]

As to the Best Answer posted by AmeliesUncle on 2/5/23 at 4:08 PM: The subject rental property in my case is located in Pennsylvania.  Pennsylvania does not allow a step up in basis for property acquired fully by a surviving spouse where the property was previously owned as joint tenants by entirety by both spouses.  This is my case.  Given this, I am somewhat concerned with how to address the approach described by AmeliesUncle when I have to prepare the PA return.  For example, how do I reverse all of the changes so as to keep the basis the same as it was?  I am in particular concerned with the proposed deleting of the old asset.

Any thoughts on how to address this situation would be greatly appreciated.

[PatriciaV]

You will need to recalculate the gain or loss on the sale using the original basis. Then make an income adjustment on your Pennsylvania tax return.

This is a complex and tedious process, and you may consider upgrading to TurboTax Live. This online service provides step-by-step guidance from a tax expert whenever you need assistance, either over the phone or by screensharing.

@PADenny