Parents and an adult child own a rental, what is the percentage of step-up basis for depreciation

[happyDonate]

Hi,

Parents and an adult child own a rental property in CA(community property state).

!) After husband passed, wife and child each gets 50% of the step-up basis.  The rental gets 100% of the Fair Market Value(FMV) or 1/3 of the FMV as the step-up basis?

2) A few years later, wife passed. Child gets 100% of the step up basis. The rental gets 50% of the FMV or 100% of the FMV?

Thanks.

[Mike9241]

Parents and an adult child own a rental property 

!) After husband (H) passed, wife(W) and child (C) each gets 50% of H's share oF FMV on date of death  

example. original tax basis 100 each total 300

fmv on date of death of H of the entire property 600

H's share 200 

so each gets 100 as new basis from H's share

so total basis now 400

200 W &C original basis + 200 from share inherited from H 

2) A few years later, wife passed. Child gets 100% of the step up basis. 

since now each own 50/50. C gets 100% of FMV of W's share 

example FMV of entire property 800

C gets 400 as basis from W's share

and retains the 200 as basis in the share previously owned

there may be a better way. discuss with an attorney about putting the property into trust. this would also avoid the cost of probate for the property. 

[pk]

@happyDonate ,  while reading through your post and my colleague @Mike9241  reasonable answer , I come up with a slight  different take on this :

(a) Start the year with H /S owning 2 shares of the house -- each valued at $100 == $200

( b) when H dies,  under CA laws H's Estate  and that of the W gets step  to FMV ---- the third share does not fall into the  decedent's marital estate and therfore  remains at original basis.

(c) when the W passes, her marrital property  ( two shares )  gets step up again  to then FMV ---- the non-marital property i.e the son's share remains at original acquistion basis.

Does that make sense ---- the step up in case of passing on an owner  gets a step up  i.e. his/ger marital portion of the Estate.  In Non-Community property  states it is only the decedent's Estate that gets step-up because there is no recognition of Marital property.

Is there more I can do for you \?

[happyDonate]

PK,

Based on your explanation, the new basis after W passing will be W portion $400 + C portion $100 = $500?

[happyDonate]

Sorry please scratch last message.

Based on 1st reply, after H passing, it will be $200 for W and C

Based on your reply, after H passing, it will be $600 for W and $100 for C

Based on 1st reply, after W passing, it will be $600 for W(at the year of W passing) and $200 for C, and $800 for C in the future years

Based on your reply, after W passing, it will be $800 for W(at the year of W passing)and $100 for C and $900 for C in the future years

Is this correct?

[happyDonate]

Hi,

According to below article, when H or W passed, does the child inherit the property from parents?

Why does her portion did not get full FMV step up?

"there is a special rule for inherited property known as the step-up in basis rule. Here’s how it works: David inherits a house from his uncle who bought the house in 1982 for $70,000. The home was worth $800,000 at the time of his uncle’s death. If David decides to sell the house, his basis will be $800,000 so he will only be taxed on the difference between what he sold it for and his new stepped-up basis of $800,000."

[happyDonate]

PK,

Your explanation emphasis on the marital (H/W) step-up basis, how about the joint tenants?  After H passed,

are W and C joint tenants on the rental? Even in the community property states, they recognize the joint tenants step up, correct?

[pk]

@happyDonate ,  I am not weel versed in legal matters and therefore suggest a consult with an attorney  because  my readings in case law suggests  there are differing opinions / nuances on how  basis step-up/down may occur in  Co-Tenancy because of the implied will / transfer  on demise of one Co-Tenant.   This beyond my knowledge  band -- I apologize for my lack of knowledge.   Please consult with an attorney.

Is there something else I can do  for you ?

pk

[happyDonate]

PK, Thanks.  You are already done very well on explanations.

Trust me I consulted with more than one attorney, some told me the holdings should be like Mike (H/W/C=1/3 each, H passed, W/C will equally share his step-up), others told me the holdings should be like you (H/W=2/3, C=1/3.  H passed, W takes his 100% step-up, C gets nothing).  

Based on the same statement on the grant deed, each attorney can interprets differently.  

Thanks.

[happyDonate]

PK,

(a) Start the year with H /S owning 2 shares of the house -- each valued at $100 == $200

( b) when H dies,  under CA laws H's Estate  and that of the W gets step  to FMV ---- the third share does not fall into the  decedent's marital estate and therfore  remains at original basis.

You said in (b), W gets step to FMV.  Take Mike's example, what would be the value that W gets step to?  

Thanks

[happyDonate]

@Mike9241 

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/my-wife-died-in-2022-...

There were a lot of conversation in above question. But my question is a little different. (1) 3 people on the deed. Parents and child, not husband and wife, (2) Property in community property states. I like to see how 3 new assets added to the property A in Husband/Wife question scenario to apply to my case.     

Based on your explanation:

At Husband(H) passed, FMV is $600, so H's share is $200.

Asset #1 H's asset $100 and his prior depreciation discard.

Asset #2 W's share $200 (original 100 + 1/2 H share 100)

Asset #3 C's share continues $200.

At W passed, the FMV is $800.  Child has 3 assets:

Asset #1) W share $200 and her prior depreciation diminished.

Asset #2) $400(800/2) from W and her prior depreciation continue.

Asset #3) C's  previously owned $200 and her prior depreciation continue.

So far so good?

However in Husband/Wife case, @tagteam stated In community property states, property held as such (husband and wife) receives a full (100%) step up in basis, not 50%. In common law states, the step up in basis is 50%. And PK in my case stated (a) Start the year with H /S owning 2 shares of the house -- each valued at $100 == $200, this is no difference from 1/3 for each party, however (b) is totally different. ( b) when H dies,  under CA laws H's Estate  and that of the W gets step  to FMV (not quite understand how much W gets in my scenario)---- the third share does not fall into the  decedent's marital estate and therefore  remains at original basis.

Based on @pk  and @tagteam, will assets new value be changed?

At H passed, FMV= $600. 3 assets will be:

Asset #1) H share, 1/3 of the original tax basis and his prior depreciation discard.

Asset #2) W share gets 100% step up $600 and her previous depreciation continue.

Asset #3) C share original tax basis and previous depreciation stay the same

At W passed, FMV=$800, 3 new assets are:

Asset #1) W share $600 and prior depreciation discard

Asset #2) C gets 100% FMV $800 due to joint tenants, and depreciation starts $0.  Is this correct??

Asset #3) C's original $100 and prior depreciation

[pk]

@happyDonate ,  having read through your above question, I come back to the suggestion  that a consult with an attorney  is required. 

 I say this because  and as I understand , the reason behind the step-up of basis  is  to affect  a tax free transfer/ distribution  of decedent's  estate without inheritance  ( without specifically creating an inheritance tax reg. ).   To achieve this though you must be able to classify the asset  as part of the Estate of the decedent.   Community property states further merge  / homologate this with creating marital property concept.

Now you have to see  which of the decedent's assets go into the his/her Estate.   Co-Tenancy of assets between husband and wife  generally does not create any complications .  However, Joint Tenancy of assets become  a special case because the asset passes to "other " tenants and not to the Estate on the demise of one tenant.  Thus  Joint Tenancy  without right of survival, gets in trouble because the  demised tenet's share of the Asset is distributed to the other x number of tenants.   This is why I strongly suggest a discussion with an attorney.

pk

[happyDonate]

@pk 

You stated, "Joint Tenancy  without right of survival, gets in trouble because the  demised tenet's share of the Asset is distributed to the other x number of tenants."

I think the grant deed stated 3 persons(Husband, wife and a child) name for the property as joint tenants.  It's impossible there are any number of other tenants.  It's not "tenant in common" that the person on the deed can will/deed to anyone else.  Joint tenants implies joint tenancy with right of survivorship because one tenant passed, the property shared by the surviving tenants on the deed.

These 3 persons H/W/C own the property in the community property state, so it's confusing to me how W&C's share should be after H passed. Is 1/3 of FMV (H's step up) passing to W and C equally or W gets 100% FMV and C gets nothing.

[pk]

@happyDonate  as I understand  joint tenancy in CA implies equal share to each  owner  -- with survivorship implies  that the share of the decedent goes to his/her heirs -- i.e. it is part of Estate -- thus eligible for step-up.  I think under this "with right to survivorship", the shares of the H/W would be treated as marital property and hence  step-up  ( to FMV) of both shares.  In such  a case  the C's share does not change  i.e. it stays as before  -- the basis that is.

I am , as you can see , struggling with this because I am not a lawyer -- therefore  my request to talk to a lawyer  or even call the CA Franchise Board --- they should be able to help.

My simple brain says  ( when right to survivorship is present ) then the basis should :

On Husbands' death  ---- Wife's share basis  is  2/3 FMV -- child 's basis  Original

On Wife's death --- the prop. basis is   2/3 FMVnew + Child's org.

Does this seem logical ?

pk

[happyDonate]

Thanks. @pk 

Based on your last reply.  I updated the 3 assets for the rental as below:

ased on @pk  and @tagteam, will assets new value be changed?

At H passed, FMV= $600. 3 assets will be:

Asset #1) H share, 1/3 of the original tax basis and his prior depreciation discard.

Asset #2) W share gets $400 step up which is  2/3 step up of  FMV $600 and her previous depreciation continue.

Asset #3) C share original tax basis $100 and previous depreciation stay the same

At W passed, FMV=$800, 3 new assets are:

Asset #1) W share $400 and prior depreciation discard

Asset #2) C gets $533 step up which is 2/3 FMV $800  and depreciation starts $0.  Is this correct??

Asset #3) C's original $100 and prior depreciation

Thanks