Gifted Rental Property

[Critter-3]

Also, there is the gift of equity to consider.  If the father has exceeded his gift exclusion limit, then the gain gets taxed twice, once as a gift and once by the operation of the non-qualified period rule against the gift recipient.  That doesn't sound fair.   Any gift tax paid would be added to the cost basis to avoid double taxing. 

[tagteam]

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@Opus 17 wrote:
Bottom line, I figure that if Congress wanted depreciation AND the non-qualified use period to follow the property to the new owner, they should have said so.  As far as I can see it just says "the period such property was owned by the taxpayer" and these taxpayers won't have a non-qualified use during the time when they own it. 

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It is simply that it defies logic and statutory construction (i.e., you generally do not read one statute in isolation when others apply to the fact pattern).

Regardless, I would be willing to bet that if the IRS were presented with these facts, they would tack the period of nonqualified use onto the donees in the same manner that the holding period is tacked onto the donees' holding period.

As an aside, it is interesting that you mentioned the stepped-up basis rules because, although we are all aware that the basis is the fair market value on the date of death of the decedent, I have been unable to find a specific statement, in the Code or Regs, to the effect that accumulated prior depreciation deductions (allowed or allowable) "disappear" at death; we all merely assume that to be the case, and it almost certainly is the case, but it does not appear to be specifically stated.

[AmeliesUncle]

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@tagteam wrote:

It is simply that it defies logic and statutory construction (i.e., you generally do not read one statute in isolation when others apply to the fact pattern).

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I disagree.  I view it in most cases the opposite is true, you CAN'T apply definitions and rules from other sections unless they are referred to.

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@tagteam wrote:

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As an aside, it is interesting that you mentioned the stepped-up basis rules because, although we are all aware that the basis is the fair market value on the date of death of the decedent, I have been unable to find a specific statement, in the Code or Regs, to the effect that accumulated prior depreciation deductions (allowed or allowable) "disappear" at death; we all merely assume that to be the case, and it almost certainly is the case, but it does not appear to be specifically stated.

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It may not be specifically stated, but I don't see how else it could be.  The depreciation lowers Basis.   The Code resets Basis to Fair Market Value at death; it would be impossible for that happen without the depreciation disappearing.

[Critter-3]

Much of the tax law is subjective and/or mute  so you have to rely on tax court decisions to support a position.  Remember that congress passes these laws and the poor IRS has to translate these ideas into tax forms and many times there are holes that may or may not be fixed/closed in the future.  I always rely on common sense as it seems to serve me well ... a teacher once said go to the basics ... what did you get and what did you give up.  And with the IRS if they gave you something what do they expect in return... what did they give and what do they want in return? 

In this case the IRS gave the owners a deduction on their tax return but it must be recaptured later.  If he gifts it then the IRS will still want something in return and that is the recaptured depreciation by the new owners.

[Anonymous]

https://taxmap.irs.gov/taxmap2018/pubs/p544-016.htm

also 2019 PUB 544 https://www.irs.gov/pub/irs-pdf/p544.pdf

Transfers at Death(p32) rule
Transfers at Death

When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. For information on the tax liability of a decedent, see Pub. 559, Survivors, Executors, and Administrators.
However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive.
Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized.

Example 1.(p32)
Janet Smith owned depreciable property that, upon her death, was inherited by her son. No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation.

[tagteam]

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@AmeliesUncle wrote:
I disagree.  I view it in most cases the opposite is true, you CAN'T apply definitions and rules from other sections unless they are referred to.

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More than one section is applicable to this set of facts; they cannot be read in isolation. Also, I disagree with you as many definitions and rules are consistent across different sections of the Code.

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@AmeliesUncle wrote:
It may not be specifically stated, but I don't see how else it could be. 

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That was exactly my point; it is not specifically stated but does not make logical sense otherwise. This is not much different than the carryover for the holding period not including what occurred during the previous holding period.