Rental property has new FMV due to death of joint tenant. Is the depreciation on Capital Improvements made during the years then stopped?

[DC]

One joint tenant died.  The rental property has a new fair market value.  Capital improvements have been partially depreciated over the years.  Will those schedules still continue, or do the capital improvement depreciation to date become factored into the new fair market value and thus go away?  Is it just the property as a whole that begins a new 27-1/2 year depreciation schedule?

[TaxGuyBill · Accepted solution]

Yes to both.  🙂

For the following, I am going to assume were only two Joint tenants, and they were not a married couple that lived in a Community Property State.

You change the current assets to 50% of the basis, and 50% of the prior depreciation.  Keep the original "placed in service" date.  So 50% of it continues.

Add duplicate assets, using 50% of the Fair Market Value at the date of death, and use the "placed in service" date of the date of death.  So the other 50% is treated as beginning a new 27.5 year depreciation schedule.

When you eventually sell the property, you should probably manually add things together and report it in the Sale of Business Property section (not the rental section).

[DC]

Thank you.  More specifically.... Property was three unrelated joint tenants.  I have been depreciating 1/3 of the house and 1/3 of improvements made during the past 20 years.

Therefore, I now continue with my 1/3 of the house....add a new asset for the increased value of the house divided by 2 and depreciate that increment for 27.5 years?

On the improvements, like a roof, I continue with my remaining 1/3.  Is there a new asset for the roof as well?  If so, is the basis the remaining amount left to be depreciated, now divided by 1/2?  And does that table start new as of DOD for the next 27.5 years?

[TaxGuyBill]

Yes, continue depreciating your 1/3, and yes, ALL assets need another 'duplicate' asset to depreciate the new portion.

For the 'new' assets, I'm not 100% sure if what you are saying is correct, so let me rephrase it another way.  Each 'new' asset will have 1/6 of the Fair Market Value at the date of death, and yes, it starts on the Date of Death and goes for the next 27.5 years.  It 1/6 is because the old owner had 1/3, and that gets 'stepped up' to FMV.  Then that 1/3 is split between the two of you, so you each use 1/6 of the FMV at Date of Death.

Does that make sense?

[DC]

Yes, that makes sense now.  I continue the 1/3 of the roof.  I add the roof as a new asset, placed is service date is DOD.  Cost basis is 50% of  the remaining amount to be depreciated; which is 1/2 of the 1/3rd and then I start the new 27.5 table.  Correct?

[TaxGuyBill]

The 'cost basis' for the 'new' roof asset is based on the FMV at Date of Death, not the "remaining amount to be depreciated".  You need to come up with an estimate of the FMV at Date of Death, then depreciate 1/6 of that for the 'new' asset, over 27.5 years.

[DC]

Thanks very much