My mom gave me 1/2 of a rental property and I am trying to set up the depreciation to mirror hers but I get $0 when she has $360. How do I adjust?

[fulleral]

I need to claim 1/2 of the depreciation for improvements she made in the past

[AmeliesUncle · Accepted solution]

Your depreciation will NOT mirror her depreciation.

Here is a simplified example:

She bought the property for $100,000.  Value of land was $20,000.  Over the years, she claimed $30,000 of depreciation.  Her Basis is now $70,000 ($20,000 for the land, and $50,000 for the building).  Her "placed in service" date is the date she made the building available to rent.

She then gave you a gift of 50% of the rental property.  Your Basis for depreciation would likely be $35,000 ($10,000 for the land, and $25,000 for the building).  You use the date you received the gift as the "placed in service" date. 

As a side note, your mom is likely required to file a Gift Tax return for her gift to you.

[Carl]

@AmeliesUncle help me out with understanding this please.

It has been my understanding and interpretation of the pubs (can't name the specific pubs at this time) that when you gift a rental property, you gift everything. That includes all carry over losses as well as depreciation. So with this gift of 1/2 the property, doesn't it all get split right down the middle and the giver basically "gives" the recipient half of everything?  That would mean the recipient would use the same in-service date with 1/2 of the giver's cost basis. That would automatically figure the prior year's depreciation.

Take note that when the recipient enters it into TTX for the first time, one question asks how they acquired the property. The selection would then be "I received this rental as a gift" and then follow the prompts/screens from there.

@fullera I am highly confident that the value of your half of the property is more than $16,000. So your mother would be required to file IRS Form 709 - Gift Tax Return.  Do not let the name of that form concern you. There will not be any tax paid on this gift by anyone, unless the gift is worth more than $11.7 Million ($12.06 Million if gift given in 2022)  which I seriously doubt. The gift tax return form 709 is merely a reporting requirement that the giver is required to complete.

TurboTax does not support IRS Form 709. However, the giver can get a blank form at https://www.irs.gov/pub/irs-pdf/f709.pdf , file it out and mail it to the address in the instructions. Simple and done.

[tagteam · Accepted solution]

A donor does not "gift" accumulated depreciation, as such. Rather, the donee's basis for depreciation is the donor's adjusted basis at the time of the gift, which in @AmeliesUncle's example is $35,000.

To put it differently, the donee does not take any part of the donor's previously claimed depreciation deductions and the placed-in service date is the date of the gift.

For federal gift tax purposes (i.e., filing Form 709), the value of the gift is its fair market value on the date of the gift.

[AmeliesUncle]

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@tagteam wrote:

A donor does not "gift" accumulated depreciation, as such. Rather, the donee's basis for depreciation is the donor's adjusted basis at the time of the gift, which in @AmeliesUncle's example is $35,000.

To put it differently, the donee does not take any part of the donor's previously claimed depreciation deductions and the placed-in service date is the date of the gift.

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Bas on my memory (which isn't great), my opinion is the the depreciation is gifted as well, but I think the law is mostly silent about it.  In my opinion, when calculating a gain or loss from the sale, the recipient in the example above should be use $50,000 ($10,000 for land and $40,000 for building) with $15,000 of prior depreciation (which will be subject to §1250 gain rates).

Regulation §1.167(a)-11(e) says that the "placed in service" date is based on the taxpayer, not the property.  For depreciation you use the lower of Adjusted Basis or FMV, so that would be $35,000 starting when the taxpayer placed it in service.

[tagteam]

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@AmeliesUncle wrote:

Bas on my memory (which isn't great), my opinion is the the depreciation is gifted as well, but I think the law is mostly silent about it. 

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Depreciation is not gifted; the adjusted basis is used for the depreciable basis going forward with respect to the donee. 

Obviously, the adjusted basis is the basis after accumulated depreciation is subtracted.

[Carl]

I've looked all over irs.gov and find nothing that addresses this specific issue. However, on the screen that asks how I acquired the property, I select "gift" and continue. Then I'm informed I need to gather the following information:

 - Date the donor (not the recipient) placed the property in service

 - Fair Market Value

 - Donor's (not recipient's) depreciation schedule

 - Gift tax paid if any (not common)

Now this (to me) seems to insinuate that my in service date will be the same as the giver's, and that I also receive the giver's prior years of depreciation.  I also note that the program does not ask for the giver's cost basis. It only asks for the FMV (at the time the gift was given I would presume) and that FMV would be my cost basis. However, that does not appear to be the case as addressed in the next paragraph below.

When I get the assets/depreciation section and start entering the asset, under the "learn more" link for the cost it states, "Gift property. The cost is the same as the adjusted basis for the person who gave you the item as a gift." So my cost basis would be the same as the donor's cost basis (or 1/2 of that in this case.)

For "date purchased or acquired" it's not clarified, as there's no "learn more" link for that one. However, this would be the date of the gift, as the date entered here has no effect on depreciation.

On the next screen it asks for the "in service" date. Here you enter the date placed in service by the donor/giver, and it's perfectly okay for that date to be prior to the gift acquisition date.  This "in service" date is insinuated from a prior screen that tells the recipient they need to have to donor's in service date. The program will figure the prior year's depreciation based on the date placed in service by the donor, along with the current year's depreciation.

Take note that I tested the above "as if" the entire property was gifted to me. It would appear the program can not correctly handle a partial gifting of rental property unless all the math is done manually. You can also just cut everything in half and treat/enter that half as 100% ownership and the program will do everything automatically then.

[tagteam]

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@Carl wrote:

When I get the assets/depreciation section and start entering the asset.....

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The donee would never get to the asset/depreciation section if the gift were of property that was fully depreciated.

In that event, there would be no need to enter an asset since the donor's adjusted basis would $0. 

[AmeliesUncle]

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@tagteam wrote:

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Depreciation is not gifted; the adjusted basis is used for the depreciable basis going forward with respect to the donee. 

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Anything to support that?

Regulation §1.1015-1 says "the basis of the property for the purpose of determining gain is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift"

To me, the Basis for determining gain for the donor would not be $35,000; it would be $50,000 Unadjusted Basis with $15,000 of depreciation.   So the recipient would receive the "same".

I can't find it now, but I thought I read something something else that semi-supported that the depreciation does go along with the gift (maybe something pre-MACRS or a related circumstance; it is was not directly applicable, but did semi-support it). 

And logically, in my opinion it should.  For example, a taxpayer buys a $10,000 widget (§1245 property) and uses 100% bonus depreciation.  Then 366 days later, he sells it.  All gain would be recaptured at ordinary rates.  If the depreciation is not gifted, he could then gift it to his son (who would receive the holding period, and assuming this is not a step-transaction where the son gives the money back to the dad) then the son would only pay long-term capital gain rates.  To me, that seems illogical (tax laws are generally logical, although there are exceptions and loopholes).

[tagteam]

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@AmeliesUncle wrote:

Anything to support that?

Regulation §1.1015-1 says "the basis of the property for the purpose of determining gain is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift"

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Probably the same support as you have in terms of the Code and Regs: not much beyond logic and the concept of "gifting" depreciation sort of defies that.

As for the Reg, for the purposes of determining gain, yes, but not necessarily for the purposes of determining the depreciable basis.

[tagteam]

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@AmeliesUncle wrote:

For example, a taxpayer buys a $10,000 widget (§1245 property) and uses 100% bonus depreciation.  Then 366 days later, he sells it.  All gain would be recaptured at ordinary rates.  If the depreciation is not gifted, he could then gift it to his son.....

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We could formulate examples all day long without any resolution and some that either defy logic or otherwise allow a taxpayer to take advantage of a certain transaction.

How about this one (if the depreciation would follow the gift)?:

Dad owns rental real estate that is fully depreciated and gifts the entire property to his son. If depreciation is "gifted", then it would be quite advantageous for both parties if the son is in the 12% tax bracket while Dad is in 37%. Nice income shift there, is it not?

Regardless, there has to be a distinction made between basis for the purposes of a sale and basis for the purposes of depreciation (and this thread was started because @fulleral needed assistance with the latter, not the former).