Depreciation on a rental property, transferred from a trust to its beneficiaries

[kaltorak]

Hi all,

My mother-in-law had just begun to rent her house out when she passed away in late 2023. 

Because reasons, the house sat in the family trust for a year, earning rental income and depreciating, and the trust got an EIN and filed a 1041 return.

As of beginning of October 2024, we got the house re-titled, moving it out of the trust - my wife and her brother now each own half directly.

In my understanding:

• 27.5 year SL/MM depreciation began when my MIL passed away (rounds to the same day the house was rented), and the value that day becomes the basis
• Nothing about transferring the house from the trust to its beneficiaries resets the basis of the house, nor the depreciation schedule (???)
• The trust claimed the depreciation expense for 3 months of 2023 and 9 months of 2024 (including the weird half-month at the very beginning) on its 104, against the rental income for those months.
• My wife should claim half the depreciation for the last 3 months of 2024 (starting once it was retitled in her name) against her half of the rental income for those same 3 months.

But I can't figure how to get TurboTax Premiere to do what I want.

• In particular, on the Schedule E Worksheet | Asset Wks, it throws a fit if I say the Date Placed In Service is earlier than the Date Acquired.
• It also very much does not approve of me overriding the depreciation value on Schedule E Wks and just writing the correct value on line 18a.  It'll refuse to e-file if I've configured it that way.

Do I have the underlying principles wrong?

If not, how do I get TurboTax to reflect what I'm describing?

[DianeW777]

Yes, you have complete understanding of the way to handle the rental property when it came out of the trust and transferred directly to the beneficiaries.

This is a way to keep the depreciation in tact without doing any real manual adjustments. Add the difference between what the depreciation should be on each return and the amount that actually belongs to the trust return, to the rental income. This will balance out the excess depreciation that doesn't really exist (it's just that it was used on the trust instead of the individual returns). The result will be the correct net profit or loss on the rental activity for both your wife and her brother. 

The return will e-file without manual intervention for the depreciation itself. And the beneficiaries will have the correct recapture amount when it is sold later because the correct depreciation will be present.

We are sorry for your loss.