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Depreciation and basis on gifted property to a trust

I'm the trustee on a trust which was gifted a rental property in the middle of December 2021.  I have a copy of the 709 which has the donor's adjusted basis and a copy of the depreciation schedule for that property.  

 

Is the basis for the trust, the donor's adjusted basis or the fair market value?

 

Do does the trust get to restart the depreciation schedule using the current building value or does it have to continue the donor's depreciation schedule.

 

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Depreciation and basis on gifted property to a trust

The trust needs the adjusted basis of the property in the donor's hands (thus the depreciation worksheet was provided) and the FMV on the date of the gift for future use if and when it gets sold by the trust or beneficiaries.  

 

Now the trust will use the lower value (adj basis or FMV)  to start a depreciation schedule all over again using the 27.5 (or 39 year) period as required ... they cannot continue the old depreciation schedule.

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12 Replies

Depreciation and basis on gifted property to a trust

Hopefully, as trustee, you understand that a gift to a trust is actually a gift to the beneficiaries. 

 

Regardless, the trust, itself, would take the donor's adjusted basis (a carryover basis) in the case of a gift.

Depreciation and basis on gifted property to a trust

Thanks for your reply.  I take it that the depreciation schedule is also continued then.

 

What boggles my mind is that the donor uses up the lifetime gift allowance exemption to do the gift.  If the scenario was a transfer upon the passing of the donor, the property would receive a step up in basis which is better for the receiver in case the property gets sold.  But I guess it's better to get the gift and have the giver be alive.

Depreciation and basis on gifted property to a trust

@EricBBL 

 

<<What boggles my mind is that the donor uses up the lifetime gift allowance exemption to do the gift>>

 

what do you mean?  it's the same $12.06mm per person regardless of the timing.  Whether the home is gifted now or inherited later, its value goes against the $12.06mm lifetime exemption that can pass tax free to the beneficiaries.  (Let's leave the annual $16,000 gift per person to the side for simplicity)

 

and better to gift an asset that is expected to appreciate faster than inflation now if you truly believe you will have an estate that exceeds $12.06mm (or whatever the inflated numbrer is in the future)

 

 

Depreciation and basis on gifted property to a trust

The trust needs the adjusted basis of the property in the donor's hands (thus the depreciation worksheet was provided) and the FMV on the date of the gift for future use if and when it gets sold by the trust or beneficiaries.  

 

Now the trust will use the lower value (adj basis or FMV)  to start a depreciation schedule all over again using the 27.5 (or 39 year) period as required ... they cannot continue the old depreciation schedule.

Depreciation and basis on gifted property to a trust


@NCperson wrote:

and better to gift an asset that is expected to appreciate faster than inflation now...


Not exactly because a (present) gift does not receive a stepped up basis (in the hands of the donee) as it would had it been acquired from a decedent.

Depreciation and basis on gifted property to a trust


@Critter-3 wrote:

Now the trust will use the lower value (adj basis or FMV)  to start a depreciation schedule.......


See https://www.irs.gov/publications/p551#en_US_201812_publink1000257004

Depreciation and basis on gifted property to a trust

@tagteam 

 

Thanks for the link ... I didn't have time to find it earlier ... relied on my memory from teaching the income tax courses :  

 

Business property.

 

If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

 

Depreciation and basis on gifted property to a trust

So far I'm understanding that since the FMV is higher than the Donor's Adjusted Basis, I will use the Donor's Adjusted Basis.

 

That amount is on the order of $10,000 for the building and there are some carry over basis from stairs ($199 left on a 31.5 year life), roof ($270 left on a 27.5 life), and refinance cost ($786 left on a 30 year life) from a prior property that were 1031 exchanged into the latest property.  

 

I read Publication 551 (12/2018), Basis of Assets | Internal Revenue Service (irs.gov) and don't see where I need to restart the depreciation schedule.  It does seem weird that the stairs from a 1031 carry over only had about a year to two left and I need to stretch it out again over 31.5 years.  

 

The link does also say that the basis is increased by the gift tax paid by the donor using the following fraction: Figure the increase by multiplying the gift tax paid by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift.

 

If the lifetime gift exemption is used then I guess there's no gift tax paid and thus no increase in basis?  This is the rub I alluded to earlier: there does seem to be a loss when the donor gives when alive rather than getting the step-up in basis when passing.

 

Depreciation and basis on gifted property to a trust

this is a mistake that many people make. rather than using an attorney to set up what's best from a tax standpoint for their heirs, they just add their children (or others) to the title. this means that the portion no longer owned by them gets no step-up when they die.  this can become very costly for the donee when they sell especially if there has been substantial appreciation over the time the donors were alive. your situation involves real estate but this is also true for other assets such as stocks bonds, etc.

 

maybe even worse, it's possible that the donee wants cash, not ownership,  and can institute a partition lawsuit.  

Depreciation and basis on gifted property to a trust


@EricBBL wrote:

If the lifetime gift exemption is used then I guess there's no gift tax paid and thus no increase in basis? 


That is correct; no increase in basis for gift tax that is not paid.

Depreciation and basis on gifted property to a trust

You cannot continue the old depreciation of the gifter.  Once you get the property in your name it is a new asset for you and it must be depreciated as a new asset using the adjusted gift basis of the doner.  

Depreciation and basis on gifted property to a trust

@Critter-3 is correct; you restart depreciation using the donor's adjusted basis.

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