How is depreciation and cost basis handled on rental property upon death of a spouse (N. Carolina)? Do I delete entry in TT and add new cost basis based on 50% of FMV?

[AmyC]

Yes, you can re-enter the property with the stepped up basis, if the property was jointly owned. Tenants in common is a different scenario than JTROS. There are a couple ways to do that. See link below for entry.

You will want to make sure you know all prior information before you hit delete. It should be in your original return.

Links to help:

Pub 551 Inherited Property Basis,

How do I edit the basis of rental property in TurboTax to reflect the stepped up basis of the 50% of...

I am very sorry for  your loss.

[jed_and_brenda]

Thanks for your response!  Taking point 2 of a suggested answer "Create another new "asset" using 50% of the Fair Market Value on the date of death, and use the date of death as the "placed in service date".".  Just to confirm - rental house bought in 1985 for 80K.  Building value of $60K has already been fully depreciated.  On date of death, FMV was $200K.  So, do I simply have the new asset valued at $100K and then start depreciation again from there over 27.5 yrs?  

[AmeliesUncle]

Yes .. *IF* the FMV of the BUILDING was $200,000 on the date of death.  If the $200,000 includes land, you need to take that into account.

[ColeenD3]

Your basis is in two parts. You and your spouse purchased the house for $80,000. Your half (apart from depreciation and other considerations) is $40,000. At death you inherited half of the FMV, that is $100,000. Your basis (apart from depreciation etc) is $140,000.

Qualified Joint Interest

Include one-half of the value of a qualified joint interest in the decedent's gross estate. It doesn't matter how much each spouse contributed to the purchase price. Also, it doesn't matter which spouse dies first.

A qualified joint interest is any interest in property held by married individuals as either of the following.

• Tenants by the entirety.

• Joint tenants with right of survivorship if the married couple are the only joint tenants.

Basis.

As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Decrease the cost by any deductions allowed to you for depreciation and depletion. Increase the reduced cost by your basis in the half you inherited.

Pub 551

@jed_and_brenda

[jed_and_brenda]

I'm almost there, so thanks for your help!  Here is the math as I now understand it.

My new basis is $140,000 (100,000 inherited + 40,000 original interest).

Since we purchased the property in 1985, the building has been fully depreciated ($60,000).  The land ($20,000) doesn't have depreciation.  1/2 of the depreciation is $30,000.  

So, my new basis is $140,000 - $30,000 = $110,000.  

Is that right?

[DaveF1006]

Please review this Turbo Tax link for more information. In Revenue Ruling 63-223, the IRS stated that depreciation determined for the period after a decedent's death shall be computed using the fair market value as of the date of death or the fair market value on the alternate valuation date,The accumulated depreciation on the rental property prior to the decedent's death is irrelevant. I am not sure if your stepped up basis of $140,000 is correct. The stepped-up basis is what the FMV or what the house is worth in the open market on the date of death or alternate valuation date.

The way that this is interpreted is that you need to begin depreciating once the FMV was determined at the date of death or alternate valuation date. Whatever that depreciation amount is between your wife's date of death or alternate valuation date and when you sold the house is what needs to be recaptured.

[Carl]

Do I delete entry in TT and add new cost basis based on 50% of FMV?

Sorry, but the way @AmyC worded her initial response is misleading.

Under no circumstances will you delete the original asset. Since the property was jointly owned by a married couple that filed joint in the past, the original asset remains unchanged.

Since N.C. is not a community property state, your step-up in basis is 50% of the FMV on the date of your spouse's passing.

rental house bought in 1985 for 80K. Building value of $60K has already been fully depreciated. On date of death, FMV was $200K.

So that's an increase of $120K (200K minus 80K) and your spouse's 50% of that is $60K. So lets work the math for the correct depreciation amount.

Of the orignal figures at purchase, 75% ($60K) was allocated to the structure and that's the amount that was depreciated.

Next, 75% of $60K (Your spouse's 50% of the basis increase) is $45K

So you simply enter a new asset with a COST of $60K and COST OF LAND is $15K.

The difference of $45K is what gets depreciated over the next 27.5 years.

Under no circumstances and with no exceptions will you delete anything from the Assets/Depreication section. If you do, then all the depreciation already taken is lost and gone forever, and future depreciation will be double-dipping. (which is fraudulent) If you do delete it, then you will find yourself in a never-ending nightmare tax-wise when one of two things happens in your future.

 - You sell the property

 - You pass away. (This has the potential to create a nightmare for your heirs, though not common)

[tagteam]

It is not 50% of the basis increase, it is 50% of the fair market value.

The deceased spouse's basis is stepped up to 50% of the fair market value as of the date of death. In this instance, that would be $100,000. If 75% were allocated to the building, the new basis for depreciation (for the one-half acquired from the decedent) would be $75,000.

[jed_and_brenda]

Thanks everyone.  I'm getting closer and believe @Carl and @ColeenD3 arrived at the same answer, just a couple of different ways.

Please confirm my understanding holistically.  My new cost basis will be $140K.  So, if I sold the property for $210K, my capital gain will be $70K which will be subject to capital gain tax rules.  I would have to pay depreciation recapture for the amount already depreciated which is $60K.

To accomplish this in Turbo Tax, I could add another asset for $60K which represents land and building.  Using the same ratio originally done (75%), that $60K will be divided into $45K for the building and $15K for the land. I can depreciate the $45K until the property is sold.

Can you confirm my understanding?

[tagteam · Accepted solution]

@jed_and_brenda 

The 50% (one-half) you acquired from your spouse is stepped up to $100,000 (FMV on the date of death). If 75% is allocated to the building, then the basis for depreciation of that one-half is $75,000.

Further, the depreciation deductions that were taken in prior years, for the one-half acquired from your spouse at death, are wiped out (i.e., depreciation starts again at the new basis for depreciation - $75,000).

The basis for your 50% (one-half) remains the same; $40,000 less depreciation allowed. 

[Betamax1]

My spouse and I were joint owners of our rental house here in Iowa.  In the publication 551 example it appears that my basis on her date of death would be:  My half of the interest in the house, plus her half of the FMV, minus 1/2 of the depreciation before her death.

To enter the new basis in Turbotax do I take the original house asset out of service and enter a new house asset starting with the date of death with the new calculated basis value or is a new house asset created with the 1/2 of FMV from her and keeping the old asset?  What is done with improvements such as the new roof and driveway?

[MarilynG1]

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.

Click this link for more info on Cost Basis of Rental Property After Death of Spouse. 

Sorry for your loss. 

[Azi1]

Maybe, the solution is to leave the information about the jointly owned property in place. Then simply add another asset as of the date of the death of spouse in the amount of 50 % of the increase in the value of the rental property. Let's assume the stepped-up value increased by $100 K with land increasing in value by $40k and building by $ 60k. The 50% of the increase is $20k in the land value and $ 30k in the value of the building. So, the new asset at $20 k for land and $ 30k for building will be added as of the date of the death of the spouse. This process will avoid retirement of the asset and editing issues within Turbo Tax.

[DianeW777]

It depends.  The asset you already have in place must be reduced by 50% (cost of land and building) as well as any other asset that still remains on depreciation for this rental property. You can leave them  in place, just change the cost and TurboTax will calculate all the correct depreciation for half of the rental for your original purchase.

Then you an add your half of the value on the date of death for the land and building for a second asset. In the future, when and if you sell it you will handle each asset appropriately and it will be just as simple as if there was one asset.

@Azi1