I've inherited rental property that was being depreciated. How do I handle past depreciation (the building and the building's assets that were being depreciated)?

[catalina-eddie]

I inherited a rental property that was being depreciated. It and its new floor coverings and appliances have been depreciated for 2 tax years. 

I believe I must start depreciating the property itself for 27.5 years, SL, using the net FMV of the building at the date I inherited it as the basis. But what about the other assets? They were being depreciated with a useful life (for tax/depreciation purposes) of 5 years. I know how much depreciation has already been taken. Do I continue to depreciate them for 3 more years on the schedule with which they've previously been depreciated?

[DS30 · Accepted solution]

You will not need to worry about past depreciation on your inherited property. You will just use your stepped up basis (FMV of property on date of inheritance) and this new basis will be used for depreciation. You will be able to depreciation these inherited assets in full over the property's useful life. For example, use the full 27.5 year, S/L for the rental house (less land) and the start date will be the date when the rental property was transferred to you.

For any prior capital improvements, these will be included in the stepped up basis on the inherited property so do not depreciate them separately.

For any appliances, since they are considered "new" to you, you will just use the new FMV of these items and depreciate them over the new useful life at the date the asset were transferred to you.

[catalina-eddie]

Let's see if I understand. Let's say my relative put in new flooring costing $10,000 two years ago, as well as appliances costing $5000. Do I just begin depreciating $15,000 in flooring and appliances over 5 years?

[DS30]

Flooring would be considered a capital improvement and would be included in your house's basis - depreciated at 27.5 year s/l. The appliances would be 5 year but you would use the FMV when inherited (and not the original cost).

[Cattlerancher]

In other words, the flooring and appliances will no longer be separate depreciating assets like they were. They are now combined/included in the FMV (of date of death stepped up cost basis) when you inherited the rental property.

[catalina-eddie]

Thanks, everyone. Very helpful.

[CarolynO]

Does this apply for inherited rental property from one spouse to another?

My CPA said: "Generally speaking the "depreciable" basis does not change due to step up due to inheritance." This seems wrong. We sold 2 of the 3 rental homes in 2018 and used the date of death FMV cost basis in the 2018 returns reporting the sales of those houses. I'm reviewing the depreciation, and this CPA did NOT use the new cost basis for the remaining house.

Your thoughts?

[Carl]

Does this apply for inherited rental property from one spouse to another?

It depends on a number of factors. Did the couple (prior to the passing of one of them) live in a community property state? Were they both listed on the deed as JTWROS?

My CPA said: "Generally speaking the "depreciable" basis does not change due to step up due to inheritance." This seems wrong.

That statement standing by itself is flat out wrong, and I'm confident your CPA would agree with me on that. So there's other factors here that you didn't mention, the CPA didn't tell you, or (more than likely) you don't remember the CPA telling you.

We sold 2 of the 3 rental homes in 2018 and used the date of death FMV cost basis in the 2018 returns reporting the sales of those houses. I'm reviewing the depreciation, and this CPA did NOT use the new cost basis for the remaining house.

Depending on the state, if the property was owned by both as JTWROS, then when one passes the cost basis does not change and they don't get a step-up in basis. This scenario is *NOT* common, but not impossible either.

Because this scenario is so uncommon, I think it might be worth while in your case to seek the advice of another tax professional, and make sure it's one that doesn't know your present CPA either. (They tend to work together, like a pack of wolves sometimes.)

[tagteam]

For property held as JTWROS by a married couple in common law states, one-half of the property receives a step up in basis upon the death of the first to die.

For property held as community property in community property states, the property is stepped up to its full market value.

See https://www.cpajournal.com/2017/08/18/greatest-hits-community-property-step-basis/

[CarolynO]

Thank you!

The property is in California, so it is community property. However, I neglected to mention that the property is titled to the AB Living Trust. FYI, the Trust never had its own tax ID number. So, everything is reported under the personal SSN of the 1st Trustee.

It just seems to me that when we sold the other 2 California homes, held in the AB Living Trust, and used the adjusted cost basis on the federal returns, we would also use the adjusted cost basis for depreciation.

Thanks for the link. Helped a lot!!