Reporting step up basis on rental property from death of spouse property in california but we lived in Colorado at the time of his death

[Missy008]

I understand California is a community property state but at the time of my husband death in 2021 we lived in Colorado I am now a resident of Arizona since 2022 and was told I needed to report on my 2022 taxes the step up basis and property depreciation.  Since the property is located in a community property state do I use the fair market value of the property on the date of my husband death 100% also what about the property depreciation that has accrued on the property prior to his death

[JamesG1]

Use the fair market value (FMV) of the land and building on the date of death. 

I assume that you owned 50% of the property and you inherited 50% of the property.  So if the original cost of the asset was $100,000 and the stepped up valuation is now $300,000, only the inherited 50% of the property will be stepped up.  The stepped up basis will computed as follows:

Original cost of inherited portion                                                       $50,000

Stepped up value of inherited portion  ($150,000 - $50,000) =   $100,000

Value of inherited portion                                                                     $150,000

Original cost of your 50% ownership                                                  $50,000

New basis of property                                                                            $200,000

Enter the asset into TurboTax with the original date placed in service and reporting the prior depreciation reported for previous years.  TurboTax will calculate subsequent depreciation expense based on the new valuation from the new asset entry.   Form 4562 Depreciation and Amortization Report from your 2021 tax return will have all of the information that you need.

If all looks good, then remove the original asset(s).

@Missy008 

[Missy008]

I have questions regarding James G reply to my question who can provide the fair market value on the property also even if the property is a community property state I am not able to use the full amount on the fair market value but I need to take 50% of the original purchase plus 50% of improvements done before my husband death then 50% of the fair market value on the date he died add these together at this becomes the step up basis other question what happens to the depreciation that has accrued and do I start over with 27.5 years or do I deduct the accrued depreciation reported on our taxes from the fair market value

[RobertB4444]

There are several ways to get the fair market value.  The easiest is to get it from the property tax rolls in your area.  An appraisal also works and is the preferred method in cases of inheritance.  And you can also find sales of property as much like yours as possible in the area where your property is located and use the value of those sales to determine what the market value of your property is.

Your basis calculation using @JamesG1 's figures is correct.  

Depreciation continues on your half of the property and depreciation is reset on his half of the property.  So, if you are going to continue to rent the property, you should create a second asset for his half of the property and start depreciation from the beginning on his half while continuing to depreciate your half on the current depreciation schedule.

If you're going to sell it then you get to cut the accumulated depreciation in half and you will only have to recapture that portion.

@Missy008 

[Missy008]

Question we had the property appraised by an appraiser approximately 4 months before my husband passed away for a refinance on the property is that accepted or not  and starting  forward in 2022 I begin a new 27.5 depreciation on the property is that correct 

[Missy008]

I am confused. My understanding was that because my husband and I held the property jointly with property going to the surviving spouse I divide the accrued and reported depreciation in half that mine half remains with me until I sell the property and my husband half is removed then I go forward with the new step up cost basis on the rental property.  My question also since the property was in a community property state (California) would I not be permitted to use the appraisal amount going forward as opposed doing the 50% calculations or is it because we resided in Colorado when my husband passed

[DianeW777]

It can be confusing. Based on the information in IRS Publication 555 for community property, you would change the cost basis of your property to the fair market value (FMV) on the date of death if you are the only heir and the house belongs to you after death under community property with right of survivorship.  This could become the new basis to you in community property states (see below) if you qualify. Our Tax Expert @RobertB4444 was explaining to you about joint tenancy. There are two types of ownership, see below.

You must decide or check with a lawyer to determine if you fall under joint tenancy or community property with a right of survivorship.

1. Joint tenancy property owned by married couples.  When the first spouse dies, the property is adjusted to FMV for half of the property for the deceased.  Joint tenancy appears the most common way to take title.  
2. Community property with right of survivorship the entire property (not just the half belonging to the deceased spouse) will receive a FMV basis on the first death. FMV for the entire property becomes the basis for the spouse on the date of death until his or her death.

Action Steps:

1.  Community Property with right of survivorship: Change the original rental property asset cost to the FMV on the date of death. Leave the date placed in service as is (do not change it).  TurboTax will calculate the current and all prior depreciation for your rental house. Keep all the records for the depreciation actually used before the death of your spouse.  It will be needed at the time of sale.
2. Joint tenancy: Change the current rental house to half the original cost, leave the date acquired and other details the same.  TurboTax will calculate the current and all prior depreciation for half the cost basis.  Next take half the FMV at death, use half of this as your cost basis and begin placed in service date for the current year.  TurboTax will calculate the other half of the rental home.

Once this is completed your rental property will be accurately entered into the tax return. 

Death of spouse.

If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule doesn't apply to registered domestic partners).

Example.

Bob and Ann owned community property that had a basis of $80,000. When Bob died, his and Ann's community property had an FMV of $100,000. One-half of the FMV of their community interest was includible in Bob's estate. The basis of Ann's half of the property is $50,000 after Bob died (half of the $100,000 FMV). The basis of the other half to Bob's heirs is also $50,000.

Please update here if you have more questions about how to change your rental property.

@Missy008 

[Missy008]

Hello 

In regard to the property I looked how it was recorded joint tenancy with right of survivorship 
With that wording I would do the method of the going forward cost basis as community property with right to survivorship is that correct

[PatriciaV]

Yes, based on the information you have provided and that you live in a community property state, follow DianeW777's instructions for community property with right of survivorship.