manually updating depreciation to account for prior year death step-up in basis

[ZAP70]

First time poster, apologies if this is in the wrong section.

I have been using TT Premier CD edition and this year I need to significantly increase the default schedule E rental depreciation on an existing property to account for an increase in basis and subsequently major change in depreciation.

Here's the situation: I have been renting a single family unit for a few years which has been titled with family members, one of whom passed away last year.  Because we are in a community property state, the surviving spouse of that family member had an immediate step-up in basis to the value of the property on the date of death last year and the depreciation schedule should have changed accordingly.  However we did not know this at the time as the death caught us off guard and we only later realized we should have completed a date of death (DoD) appraisal. 

This year we completed the formal DoD appraisal so we now know what the total property value was on the date of death, what the relevant basis was for the surviving family members, and have completed a more formal land to building valuation.  We have also calculated out what the depreciation should be each year moving forward.  But because technically last year's depreciation was too low, we need to add this on top of what this year's normal 27.5 year S/L would be.  Our appraiser told us not to bother filing an amended tax return for 2019 and instead to add extra depreciation this year to catch up to where we would have been.  I know what that "extra" number should be for this year and what the 27.5 year S/L depreciation would be moving forward.

The question is not "how do I calculate these" but instead the question is "How can I override the TT default numbers to input those numbers"?

When I go to the rental section it imports last year's numbers (cost/basis of the property, land value, and prior depreciation) all of which are now incorrect.  What I really need to correct manually for this year includes

- basis of the property, now updated due to the death

- land value of the property, now updated due to the new valuation

- override the 27.5 year S/L depreciation calculation based on the two points above to "add back" the depreciation I did not take last year but which I should have taken.

I'm sure there's some advanced mode I can go into that will let me manually override this and any assistance in finding the relevant fields would be greatly appreciated.  I already now what the final numbers should be, just not how to input them!

Many thanks in advance.

[Mike9241]

I think the IRS would disagree with the appraiser.   in a community property state, joint ownership by only a husband and wife can be handled directly on their 1040.  however,  you say "owned my family members" which suggests there are and were owners other than the husband/wife.  if so, then I believe a partnership return should have been filed for all the years the property was rented.  if a partnership return needed to be filed a 754 election (to step-up basis) needed to be made in the year the transfer took place (2019). 

if  a partnership return is required then

from the IRS regs which govern the election

Time and method of making election.

(1) An election under section 754 and this section to adjust the basis of partnership property under sections 734(b) and 743(b), with respect to a distribution of property to a partner or a transfer of an interest in a partnership, shall be made in a written statement filed with the partnership return for the taxable year during which the distribution or transfer occurs. For the election to be valid, the return must be filed not later than the time prescribed by paragraph (e) of § 1.6031-1 (including extensions thereof) for filing the return for such taxable year (or before August 23, 1956, whichever is later). Notwithstanding the preceding two sentences, if a valid election has been made under section 754 and this section for a preceding taxable year and not revoked pursuant to paragraph (c) of this section, a new election is not required to be made. The statement required by this subparagraph shall (i) set forth the name and address of the partnership making the election, (ii) be signed by any one of the partners, and (iii) contain a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b). For rules regarding extensions of time for filing elections, see § 1.9100-1.

if a partnership return is required but not filed and since it's obvious no 754 election was included, consult a tax pro.  penalties for failure to file a partnership return are about $200/per month/partner for up to 12 months.  each year stands on its own for penalty purposes. it may be possible for the her to report the depreciation of the step-up directly on her return if no valid 754 election was made but she would have to file an amended return. 

also I just want to make clear is only the heir that gets the step up not the other owners.    

let's say depreciated basis is $5 heir inherits her spouses 20% interest so to start heir's basis is $1.  also assume FMV of the 100% of the property is $10 so heir's share  is $2 

[ZAP70]

Hi Mike,

Thanks very much for your response. I fear in my attempt to simplify the situation I may have caused you a lot of additional work, though your response is truly appreciated. Since you were kind enough to provide all this input I'll try to clarify as the actual concern I have is still about how to input this data into TT.

On original purchase the property was titled both to myself and my parents. I actually lived in the property, provided all the payments, upkeep, maintenance, and essentially 100% of all operating costs.  It was for my sole usage and the mortgage was in my name alone. But because my parents provided some assistance with the original down payment the property was titled 1/3 to me and 2/3 to them (with their 2/3 being community property TIC). At that point the overall basis in the property was the composite of 1/3 of each of our (equal) basis.

Fast forward several years, I eventually moved out of the property and turned it into a rental unit. The basis had not changed and thus 27.5 year S/L depreciation was taken based on the building value of the overall composite property basis using the county assessor's 50:50 land to building valuation. However I was still providing all the operating expenses and doing 100% of maintenance and also receiving 100% of the rental income, thus this was NOT a partnership and schedule E data was only reflected on my 1040, as suggested by my cpa at the time.

When one of my parents died last year, the other automatically received a step-up in basis to the value of the property at the time of death. Typically you would be correct in stating that heirs get a step up in basis but in this situation the immediate next heir was my surviving parents, the spouse who was also a co-owner of the property (2/3) in a community property state. In my state the surviving spouse then automatically gets not only the deceased spouse's basis stepped up, but his/her own basis in the same community property as well. So 2/3 of the total unit's basis reset (both parents, one still alive) while 1/3 (my original basis) remained the same. I have separately tracked the unadjusted (without depreciation) and adjusted (with accrued depreciation) for each of the title-ownership components of the property.

Because of death last year, the depreciation which was allowable and should have been taken during the year of death was actually higher (basis went up significantly due to the death) than what I actually took on last year's tax return on schedule E - at the time I was not aware of any of the information and was still helping my surviving parents deal with the aftermath of the death. It was only after speaking with both an appraiser and another real estate cpa that I realized the above basis issues and did the calculations to determine what

the new depreciation moving forward should be and what this year's temporary extra depreciation should be.

So that's a long winded way of saying that I still need to manually override the property basis and the 27.5 year s/l depreciation for this year and all subsequent years *and* also add the depreciation I should have taken last year above the baseline to this year's return only. Frankly in either case I'll be way in loss territory for this property and will be carrying forward 100% of the loss to future years whether or not I take this "extra" depreciation or just use the new S/L values moving forward. But I'm trying to correct everything such that on Jan 1 of 2021, the total accrued depreciation and adjusted basis will be correct for what it *should* have been had I properly done all of this on the year one of my parents died in 2019.  And then 2021and beyond will be a straightforward continuation of the S/L depreciation.

So with that lengthy explanation I'll try to focus back on the specific questions I have for the forum:
- how do I manually override and change a property's basis and land ratio for a current year to reflect a change from the prior year (as the new total basis has changed and the land to building ratios updated by the appraiser)?
- how do I manually override the calculated depreciation which TT would spit out based on building basis to "add back" depreciation I should have taken in prior years?

Neither of these two features can be done in the step by step automated version of TT. A bit of additional reading after posting my original message suggests something in the "forms" settings may allow me to override this, but I wanted to check the forum first as it's my first time messing with the forms settings.  I know what the numbers should be, just not where/how to input them.

Thank you all for your consideration and hope everyone is having a great holiday.