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?

[ming3]

For example, if the original cost is $200,000. It has been depreciated for a few years (say, depreciated $20,000 already). Now the Fair Market Value on the day of her death is $400,000. What should I do in Turbotax to step up the cost basis to get more depreciation? Should I simply change the original Cost Basis (i.e. $200 k) to the new step up'd cost basis of $300 k (i.e. 50% step up)? How about the amount that has already been depreciated in prior years (i.e. the $20,000)? Should I cut it in half (So the new depreciated amount will be $10,000) since my wife's part should be wiped off?

[Carl]

I'm sorry for your loss.

Should I simply change the original Cost Basis (i.e. $200 k) to the new step up'd cost basis of $300 k (i.e. 50% step up)?

No. Absolutely not. If you change the cost of "ANYTHING" in the existing asset, you will completely mess up the depreciation history, as well as the current year depreciation. Under no circumstances and with no exceptions do you every change the original cost basis entry of any asset. No exceptions.

What should I do in Turbotax to step up the cost basis to get more depreciation?

You simply enter a 2nd asset with a cost basis that is the amount of the step-up. Remember, the cost basis of the land steps up too. So if the original cost basis on the property was $200K with 50K allocated to the land, lets say the new cost basis is $300K. 

Since the original cost basis allocated 1/4 of the total to the land, you must do the same with the step-up. You'll enter a new asset with a cost of $100K in the COST box, and $25K in the COST OF LAND box. The program (not you) will do the math and allocated 3/4 ($75K) to the structure. You can call the new entry whatever you want, so you know what it is. But it's classified as Residential Rental Real Estate in MACRS with an in service date equal to the date of passing, and depreciation on that stepepd up basis will be over the next 27.5 years starting on the date of her passing. So the first year depreciation on that will be pro-rated based on the date of passive/in service date.

[tagteam]

I am sorry for your loss.

Note that if you held your interests in the rental as community property, there is a 100% step-up in basis.

[ming3]

I am in FL, which is not a community property state. So, I will only get 50%. But thank you for your reply!

[ming3]

Hi Carl,

Thank you for your detailed reply!

I just want to confirm my understanding is correct:

1. From now on, a single property will become 2 assets in Turbotax for all coming years until the property is sold. The 1st one is the original which will not be changed at all, the 2nd one is just the step up portion of the same real property. These two will always be kept separately in Turbotax. Is that right?

2. Do I need to prorate all my expenses, one by one, between these two assets every year? Can I leave everything to the original asset as before, and put nothing (No income, no expense) in the newly created "step up" asset? This way, the "step up" asset will only have depreciation but nothing else. Turbotax will automatically combine all rental assets when calculating total rental income and tax, so to me, the end result will be the same and it will save me a lot of time to prorate and divide all expenses between these two assets every year. Is this allowed?

Thank you for your help!

[tagteam]

@ming3 

The answer to your first question is, "Yes"; TurboTax will keep the "two properties" separate as they will appear on separate worksheets in the program.

With respect to your second question, you can handle the properties in the manner you described without any future issues, unless you decide to convey half (or less than a full share) of the property at some point in time. If you sell the entire property to a third party, the procedure you outlined will work without any issues in the interim.

[Carl]

You really need to stop over thinking this, as all you're doing is creating problems in your mind, that do not exist in reality.

1. From now on, a single property will become 2 assets in Turbotax for all coming years until the property is sold. The 1st one is the original which will not be changed at all, the 2nd one is just the step up portion of the same real property. These two will always be kept separately in Turbotax. Is that right?

Spot on correct.

2. Do I need to prorate all my expenses, one by one, between these two assets every year?

No. In fact, that's not possible. You have "ONE SINGLE PROPERTY" that is split in to two separate assets. Everything will show up on the SCH E as a single property under column A of the SCH E.

Can I leave everything to the original asset as before, and put nothing (No income, no expense) in the newly created "step up" asset?

Again, you are confusing yourself. Expenses aren't taken against a single asset. Expenses are taken against "the business" (rental property *is* a type of business) as a whole. If you change 'ANYTHING" on the original asset entry, you will screw up the depreciation history, and because of that the current year's depreciation will also be flat out wrong.

This way, the "step up" asset will only have depreciation but nothing else.

Just like the originaly asset entry will have "only depreciation but nothing else", as it has since day 1 when you entered it.

Turbotax will automatically combine all rental assets when calculating total rental income and tax, so to me, the end result will be the same and it will save me a lot of time to prorate and divide all expenses between these two assets every year. Is this allowed?

Allowed? You're not breaking any laws here. This is how you do it, and the easiest way to do it "correctly" in TurboTax. Remember, the IRS doesn't care about "how" you arrive at your figures. They only care that you report the "correct" figures.

[ming3]

Hi Carl,

I am more confused.

Actually, I have two rental properties (Say A and B). Now as you said, I need to add the step up portion as a separated asset for both of them.

Say for property A, how can I add the Step Up asset and let Turbotax know this asset will go with the original asset for property A, but not go under property B? Which page in Turbotax online will allow me to add an additional asset to an existing property (So the newly added asset will go with the existing asset into the same column in Schedule E)?

Thanks!

[AmeliesUncle · Accepted solution]

For this year, each existing "asset" (for both properties) should actually be turned into THREE assets.

1. A new one with 50% of the original Basis, 50% of the "prior depreciation" and the original placed in service date.  This is 'your' portion that you have previously owned and will continue to depreciate.
2. A new one with 50% of the original Basis, 50% of the "prior depreciation" and the original placed in service date.   Mark that "asset" as "disposed" and say you converted it to personal use on the date of your wife's death.   That is your wife's portion before she died.  This one will not carry forward to future years.
3. A new one with 50% of the Fair Market Value on the date of your wife's death.  The "placed in service" date would be the date of your wife's death.  This is the stepped-up 50% that belonged to your wife.

After you are sure you have all of the new information, delete the old asset.

[tagteam]

@AmeliesUncle is on the right track here, @ming3.

However, note that you will not be able to get the properties into the same column on Schedule E in this form with TurboTax.

[Carl]

It is impossible in the program, to add an asset to more than one rental at a time.

Select the Rental & Royalty Income (SCH E) section of the program. Work through to the list that shows your two rental properties. Elect to Edit/Update any one of the properties. Work through to the screen that shows rental income, rental expenses, assets, etc. Elect to Edit/Update the Assets/Depreciation section. In the list of assets, you will see at a minimum the property itself listed there. On that same screen you will see a button for "ADD ANOTHER ASSET". Click that button and add the asset. This will add your asset to that one property only.

Do the same thing for the 2nd property.

[AmeliesUncle]

WAIT!  I'm going to edit my prior post.  It is wrong.    There are two ways of doing it (the way I'm going to describe above is the much better way of doing it) and I was garbling my thoughts and incorrectly combined the methods.  Wait a few minutes until you read it.   🙂

EDIT:  Okay, my original post is fixed now.  🙂

[tagteam]

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@AmeliesUncle wrote:

EDIT:  Okay, my original post is fixed now.  🙂

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OK, so you just added an asset that is simultaneously disposed of in the program, but the other two are exactly the same. 

[AmeliesUncle]

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@tagteam wrote:

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@AmeliesUncle wrote:

EDIT:  Okay, my original post is fixed now.  🙂

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OK, so you just added an asset that is simultaneously disposed of in the program, but the other two are exactly the same. 

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My original post showed to have a Joint asset, but then I incorrectly also said that the OP's 50% is depreciated using the original placed in service date.  That would incorrectly give some double-depreciation.

My corrected description essentially just replaces the old/original asset with two 50% assets.  Then the wife's 50% is further divided between pre-death and post-death.

[ming3]

@Carl, @tagteam, @AmeliesUncle,

Thanks for all of you!! Now I think I understand what you have mentioned.

In an existing property, under Assets section  -> select Rental Property, click Edit button, then:

- Add a new asset, which could be called like "Step up".

- Put in all the info:

  * The description could be the same as the original address, plus "Step up"

  * The total cost (including land) should be (Fair Market Value - Original Purchase Cost) x 50%

  * The date acquired should be my wife's date of death

That's all I need to do (And do it one by one for all my rental properties).

Please correct me if I am wrong.  Thanks again!