Reporting step up basis on rental property prior owned by the death spouse only

[Lynn59]

We have rental property in FL, which titled under my husband only when he passed away.  We are NJ resident and have been reporting the rental property on our jointly tax return.  My question is how do I report the step up basis for the rental  property?  Should I take 100% or 50% as value of inherited portion? What are the steps to report the step up basis rental property in TurboTax?  Thanks!

[tagteam]

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@Lynn59 wrote:

What are the steps to report the step up basis rental property in TurboTax? 

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I am sorry for your loss. Read @AmeliesUncle's post in the thread below.

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/my-wife-died-in-2022-...

[pk]

@Lynn59 , please accept my condolences on your loss. 

(a)  coming to your question about the rental property -- because you are NJ resident ( and as was your husband), NJ laws will determine  who owned the prop i.e. was it marital property  or  solely his.   Not knowing the antecedent of the situation and assuming that ONLY his name was on the  title for a reason, one could argue that  he owned  all 100% of the  asset and therefore  FMV step-up would be applicable  to the whole asset.   Only you know the reason and the back ground.

(b)  NJ being not a Community property state  and under its  "equitable  ownership right"  takes many factors into account while deciding on division of ownership ( such as  in a divorce ) -- your  lawyer would be a good source -- but again , you know the facts / intents etc. of the situation  to determine whether it was his personal asset or marital asset.

(c)  another issue in my mind ( I have found no caselaw  or statute to help me here )  and that is the  depreciable basis of the asset  post a  step-up.  I recognize that the impetus for  step-up was to  allow   transfer ownership  in case of inheritance without taxation  ( US has Estate and Gift tax but no inheritance tax as such ). Neither   of the two statutes  involved here  directly  ( section 1014 on basis adjustment and  section 167 on depreciation  ) address the issue  clearly enough for my feeble brain.   The issue is  that  when you increase/ adjust the basis  of  an income property how do you apportion the  changed basis   between depreciable basis  (  improvements with a fixed life ) and  non-depreciable basis  ( land ) ?  -->

                     ( a) one obvious option is to  consider this  a   new asset with new  depreciable  and non-depreciable basis and full life -- this is what would happen if this was a new owner.

                     (b)  the other and more contorted option would be allocate the step-up increment between  the  two different bases  ( Depreciable and Non-Depreciable  ) and keep the  life of the asset same.

My general preference is for the first option as it is cleaner  and  an accepted path  for a new owner . 

pk

[tagteam]

This scenario is not complicated if @Lynn59 acquired 100% of the rental property from the decedent.

In that event, the property gets a full basis adjustment (step up to fair market value on the date of death).

Any accumulated depreciation deductions essentially disappear; depreciation deductions would begin with a new 27.5-year recovery period and basis (fair market value on the date of death).

Land value would be allocated based on that same fair market value on the date of death.

EDIT: Note that my original post can be disregarded since @Lynn59 acquired 100% of her interest from her husband (the decedent). The "split basis" would only have applied if the property were jointly owned.

[Lynn59]

Thanks all replies to my question!  Really appreciated! 

our rental property in FL was purchased during our marriage.  It was paid partially by my husband’s  401k loan and our savings.  It was titled under my husband’s name only from the beginning until he passed away.  As I mentioned before, we are NJ Resident, and have been filed joint tax return.  After the probate process in FL,  the title was transferred to me this year.  

I hope above information will help all experts to get the whole picture.  So I can make the right decision to report the step up basis.  

Any inputs are appreciated .  Thanks 

[tagteam]

Is the property still a rental?

Your basis would be the fair market value of the property on the date your husband passed. When title was actually transferred to you is irrelevant for that purpose.

If you're still renting, then you would enter the fair market value of the structure (unit) exclusive of land and that would be your basis for depreciation. Also, the recovery period would be the standard 27.5 years for residential real estate.

[Lynn59]

Thanks Tagteam ! The property is still a rental.  My husband passed away on December 2022.  Do I need to amend that year’s tax return for this rental?  Do you mean that I can take 100% fair market value excluding land as the new depreciation base?  Thank you very much!

[tagteam]

Yes, you can take 100% of the fair market value, excluding land, as the new basis for depreciation.

[Lynn59]

Thanks for your confirmation!