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Depreciation of new rental property

Maybe I'm overthinking this.

My mom's cost basis for the jointly owned home she and Daddy had that is now a rental.  A couple of people have confirmed how to find the adjusted basis.  They reminded me to add in 50% of the FMV of the property on the date Daddy died.  

According to the property records for 2021, The FMV of the property is $356,500 with a land value of $120,700.  No one advised me to deduct 1/2 of the FMV of the land.   Every response said add in $182,750.

So do I just use $182,750 (1/2 of FMV of property) OR do I use $122,400 (1/2 of FMV of property $182,750 - minus- $60,350 (1/2 of FMV of land).

 

Thanks for your help!!  This is very complicated and I want to get it right!!  

LeonardS
Expert Alumni

Depreciation of new rental property

Nowhere do I see where it was asked or determined if you live in a community property state.  If you do this has a direct impact as Federal tax code section 1014(b)(6) provides that community property assets step up 100 percent in basis at the death of one spouse (even though the other spouse survives).  If your Mom lives in a community property state her basis would also be increased to the FMV on the date her spouse died.

 

Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

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Depreciation of new rental property

She lived in South Carolina which is not a community property state.

 

So does the 50% FMV step up basis need to be decreased by the value of the land on the date Daddy died.

 

Thanks for your help!

AmyC
Expert Alumni

Depreciation of new rental property

No. The basis of the property is simply your mother's original basis (1/2 of the cost plus improvements) plus 50% FMV at time of spouse passing. That is the number to enter for the basis of the property. Then you are asked to enter the value of the land- not the basis of the land. 

 

The program subtracts the difference and depreciates on that amount. If the house is going to stay a rental until your mom passes, it is rather irrelevant as you would inherit at fair market value. However, if she sells the house, then the depreciation will reduce basis and increase gain. 

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