Help With Depreciation of Inherited, Foreign Rental Property, Cost Basis and The Recapture Tax

[ParkNYC]

Hello Pros,

I'll need some help regarding depreciation of my rental property, cost basis.

I own a foreign real estate property -  I own100% in a two family house.

I purchased 50% (one apartment and 50% of the land) in November 2021 and I inherited another 50% after my mom passed away in January 2022. I started renting both apartments, one in January 2022 (which I purchased in November) and second one (inherited) in March 2022.

My questions are:

1. How do I calculate cost of basis, do I have to calculate them separately (2 apartments) or as a whole (I own 100% in this property)? Do I have to depreciate them separately, I receive two rents?
2. Can I add lawyer’s fee, court fees, taxes and other expenses, which occurred during transactions and I paid, to the cost of basis?
3. Can the property I inherited be valued higher than one I purchased, even if it’s a part of the same real estate? The inherited apartment was in better shape.
4. Can I depreciate both properties (even inherited) or only the one I purchased?
5. What would happen if I stopped renting my property for a few months or longer, can I still depreciate and deduct this as an expense during that tax year?
6. What happens to depreciation when I stop renting either of my properties and there will be no rental income?

Thank you,

ParkNYC

[DianeW777]

1.. For 2021, you will depreciate only your half of the property since your mother died in 2022.  I am sorry for your loss.

2. Yes, for the second half of the property you inherited in 2022 you will add the expenses necessary to transfer the property to you if they are not used on the estate return as expenses.

3. You will continue to use the actual cost to you for the first half you purchased. The other half that you inherited will have a cost basis of the fair market value (FMV) on the date of death. You will want to set up both properties separately in 2022 so that the depreciation is correct and you get all you have coming to you for the second half of the property since the date placed in service for you is later than the first half of the property.

4. For 2021, you will depreciate only the half you purchased.  In 2022, you will depreciate both, by adding another asset for the inherited portion.

5. If your property is not used for personal purposes and is still available for rent, then you continue to enter your expenses and take the full depreciation each year.

6. If you mean you are no longer using it as rental units, then you would remove it from service until you do or until you sell it. Please see the previous response to question 5.

[ParkNYC]

Thank you DianeW777, so I can even depreciate an inherited property, that's good news. I also have a follow up questions;

Regarding your answer #6. Scenario: I stop renting the apartment for 2-3 years and I and decide to rent again after 2-3 years, the depreciation would start again from year 1 or I'll continue when i stopped. It would also trigger the recapture tax if i understand correctly.

Also: Can I depreciate a personal real estate property which I've owned for years, but decided to rent in 2022? 

Thank you very much.

[ParkNYC]

@DianeW777, thank you for your answer, any chance to follow up on my additional questions?

Thank you,

[DianeW777]

Yes.  You would indicate the property was removed from service but not sold during the period where you are not attempting to rent it.  This puts it in a holding status until and unless you rent it again. The recapture tax is not a consideration until the property is sold. 

When you begin to rent the property again, it's going to be a manual tracking for the depreciation expense that is actually used on the tax returns. My suggestion is to add the property back to your tax return when it is again available for rent. Use the original beginning date placed in service.  It should not begin again from year one. It's too complicated for a tax software to automatically know the prior depreciation used.  You will need to track this yourself until you sell.   In other words TurboTax will assume you used all years of depreciation, you will know which years you did not use the property (dormant). It will matter when you sell the property.

Yes, you can use a property you have had for years.  The difference here is that you must use the a depreciable basis that is the lesser of:

1. The actual cost of the property including capital improvements and purchase expenses; OR
2. The fair market value (FMV) of the property on the date placed in service

In your case it's quite likely the cost is going to be the lesser of the two.

[ParkNYC]

Thank you @DianeW777 , the property I'm thinking to rent is the house which I've been building myself from scratch. What's my basis in such property? I'm assuming, the cost of land plus all my expenses (construction cost). Am I right? Thank you.