Reporting Rental Property transfer to survivor spouse after death of owner spouse

[joepmo]

This is likely a simpler situation than I am stating, just unfamiliar territory for me.

1. Husband individually owned rental house purchased in 2004 - Purchase price $50,000, (40,000 house, 10,000 land) has deprceciated about 27,000 since putting it in service.

2. Husband and wife married about 10 years ago and file a joint return. (non community property state)

3. Husband died in 2024 intestate, house is currently in probate but will likely transfer to wife in 2025 at conclusion of probate.

4. House is no longer being rented as of end of 2024.

5. Wife intends to sell house, value at time of death and currently is approximately $100,000. Assume that will be sale price.

6. I understand that wife would get stepped up basis as of date of death, but not sure how to record property no longer being rental property and also impact of any depreciation recapture, either at time of transfer to wife or at eventual sale.

7. What happens to the accumulated depreciation that husband was deducting before death?

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[PatriciaV]

Since your spouse passed away in during the year, you can still file a married filing jointly tax return for that tax year. You do need to indicate in the Personal Info section that they passed away. 

Under Rental Properties, work through the property profile and check the box for "I stopped using this property as a rental in 2024." Answer any follow up questions. Basically, you are reporting that the property was converted to personal use. Because there was no legal change in title, the property remains on the joint return as part of the estate.

The accumulated depreciation will become a factor when the property sells. Your stepped-up basis for the inheritance must be adjusted for the depreciation taken as a Rental Property when you report the sale to determine if you have a gain or loss.

[pk]

@joepmo ,  assuming that you are using Windows  TurboTax Home & Business  ( that is my go to  and can do the most complicated returns ).  I am  looking at it as a sale / disposition  in 2025  --  and therefore 2026 filing.

(a)  Under business tab select  Sale of business property.  This will then ask for  details about the property.                             1.Provide  the Basis as  current  stepped up value  ( since this was not community / marital property  it will step up to FMV at the time of  the decedent )

                   2. Provide the  accumulated depreciation  -- get this from  the depreciation  document  included in 2023  worksheet   and include  the amount for 2024.

                     3.  Provide  the sales proceeds ---  from  HUD-1  should be helpful .  What you are looking for  are the sales  Proceeds = Sales Price LESS all allowable  sales expenses  ( e.g. any repairs etc. for a sale, real-estate commission, transfer tax, title insurance  etc. etc. ).

                       4. TT will then , through the rest of the screens compute  the  total capital gain.  Note that  out of this gain, that  portion due to accumulated  depreciation is treated as ordinary gain and then the rest is given capital  gain ( and therefore capital tax rate ).

Does this help ?

Is there more I can do for you ?

[joepmo]

The property will not be used as rental property after the husband's passing.   Basically it was vacant and wife does not want to rent it out.   just sell it.  It was my impression that the accumulated depreciation prior to the husbands death basically went away.  The wife does not inherit the accumulated depreciation.

[pk]

@joepmo , the basis is stepped up ( at the estate level i.e. before distribution to the  inheritor (s),  all other characteristics remain intact .   So no , you cannot ignore the "recapture".

[AmeliesUncle]

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@joepmo wrote:

It was my impression that the accumulated depreciation prior to the husbands death basically went away.  The wife does not inherit the accumulated depreciation.

---

That is correct.

[pk]

@joepmo , @AmeliesUncle , 

I   understand  the general position that 

(a)  Because US does not have an inheritance tax, but does have Estate Tax,  the  method of achieving this  is  having a step-up to FMV -- so no inheritance tax when the asset is disposed of by the inheritor(s).

(b)  And  because there must be  co-ordination in the valuation of an asset for  Estate  Tax purposes and  capital gain  at disposition  ( by Estate or by inheritor ) so FMV both purposes seems logical and necessary.

My struggle  ( and I am probably wrong in this  ) is that section 1014   kind of askew this  -- I show the  portions  that create a [possible issue  -- may be I am reading it wrong ( quite likely :(

  "       26 U.S. Code § 1014 - Basis of property acquired from a decedent

(a)In general

Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—

(1)

the fair market value of the property at the date of the decedent’s death,

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.

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(b)Property acquired from the decedent

For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:

(1)

Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;

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.

.

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(9)In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent  "

pk

[AmeliesUncle]

That is interesting, but contrary to everything I have previously read on the subject. 

I don't have time right now to research into it, but I'll come back and look into it later.

Thank you.