cost basis for rental property after husband dies

[dplew]

Hi All

I'm working on my mom's taxes.  Her and my father owned rental property for over 11 years and he passed away this summer.  We had the property appraised for date of death value and ending up selling the property at the end of the year.  My mother received a full step in basis since since the rental was community property.  

I am going through the turbo tax and I'm wondering how I do adjust the cost basis to reflect the new basis.  Do I just adjust the original cost/land and leave the date it became a rental and the prior depreciation?

Thanks so much!

[tagteam]

You can adjust the cost basis to reflect the step up and use the original acquisition date.

Prior (accumulated) depreciation essentially disappears in this instance (i.e., there is no recapture nor need to report accumulated depreciation).

[Mike9241]

wouldn't it be more correct to say that for the portion of 2021 he was alive rental income, expenses would be reported and depreciation taken on the historic basis. after death, the rental income and expenses would be reported but depreciation would be computed on the appraised value.  of course this depends on what period the property was rented in 2021

[tagteam]

Yes. Rental income and expenses would certainly be reported (and depreciation deducted) for that portion of the year in which he was alive on their joint return.

Obviously, upon death the new, stepped up, basis is effective and depreciation would be computed on that new basis over a 27.5 year period.

[DavidD66 · Accepted solution]

No. Do not adjust the original cost basis.  If your parents were in a community property state, your mother can claim a new stepped-up basis on the home's entire market value.  According to the IRS, the tax basis of inherited property is generally the fair market value on the date of death, or the alternate valuation date if that value was used on the decedent's estate tax return.  Depreciation for the period after a decedent's death is computed using the fair market value as of the date of death or the fair market value on the alternate valuation date.

For the new basis, the accumulated depreciation on the rental property prior to the decedent's death is not considered.  Once the property has been inherited, the depreciation schedule would begin based on the new fair market value. Depreciation expense in the year of inheritance, prior to date of death would be calculated using the old cost basis.

To accomplish this in TurboTax, you want to retire the assets (both house and land) as of the date of death.  You can do this by indicating you converted the rental to personal use.  This will stop the calculation of depreciation as of the date you 'convert".   You will then start a new rental property placed in service as of the date of death using the value from your appraisal.

[tagteam]

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@DavidD66 wrote:

No. Do not adjust the original cost basis.  If your parents were in a community property state, your mother can claim a new stepped-up basis on the home's entire market value.

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We just wrote that.

Also, @dplew is aware of the stepped up basis since the original post contained the following sentence:

"My mother received a full step in basis since since the rental was community property."

[dplew]

Appreciate the details on how to accomplish this in TurboTax!

[PJ-Seattle]

Question for Expert DavidD66 or Others

Re:  2/22/22 response regarding stepped up basis & new depreciation for rental property after a spouse dies in community property state

I understand the steps in your post to retire the original asset as of the date of death and then set up a new asset with the new stepped-up basis value for the building.  If this is done will the Schedule E show two properties with the same physical address for the first year (i.e. the year of death)?  Will this trigger a rejection or audit by the IRS?  Is there somewhere in Turbo Tax where a note can be added before filing electronically?

[AmyC]

1. Yes, 2 sch E with the same property address.

2. No, this will not trigger a rejection or audit as this is a normal process.

3. No note is necessary since the sch E dates will show one is taken out of service while the other begins service.

@PJ-Seattle 

[jacciu]

Excellent response, thank you.  My wife passed and it is not a community state so I understand only half of the basis of an investment rental gets stepped up. I am confused with the depreciation taken prior to her death and how to manage it going forward.  Does her half of the new stepped up basis start over with a new 27.5 years and my original basis stays with the 27.5 years remaining when we put the rental into service?  Thank you

[tagteam]

Correct; half of the basis is stepped up to fair market value.

Also, half of the depreciation (deductions taken prior to passing) disappear. 

[jacciu]

Excellent, thank you. In an earlier response in a community state where the entire basis is stepped up you directed the requestor to convert the property to personal use then acquire the new stepped up basis.  How do I do this for my situation when only half the basis is stepped up.  Can I convert half to personal use and then acquire the same property at the stepped up basis and only use half for personal use.  I assume TurboTax allows this.  Thank you

[tagteam]

Read @AmeliesUncle's response in the thread below.

Solved: My wife died in 2022. In Turbotax, how can I Step Up the cost base of our rental property to...

[jacciu]

Thanks for this excellent advice.  I tried to mark my original investment property as 0% investment use and it flags it as an error.  So I zero'd out the land and the house and made it 1/365 days or 0.0227% investment use and the error went away.  Is there a better way to do this.  I could not find how to convert the investment property to personal use which was discussed in this message chain.  Thanks

[AmyC]

Yes, follow these steps:

1. Edit the rental property,
2. From the summary, select Property Profile.
3. Continue through to Do Any of These Situations Apply?
4. Selected converted to personal use

Your personal use will begin with the date of death so the new rental can begin with the stepped up basis.

I am very sorry for your loss.