Past depreciation of commercial real estate in stepped up basis

[chrissim2]

My mother owned a commercial building in Massachusetts that was part of her Trust. The building was originally built in 1968. When mother died in 2015, the building was passed to an LLC (partnership) formed by the heirs in 2016.  An appraisal was done at the time of mother's death so the FMV was then $490,000.  The accountant stepped up the basis and added depreciation to the stepped-up basis amount (approximately $360,000) by SL over 39 years.  He also continued to depreciate prior capital improvements as had been done in the Trust using SL depreciation.  The LLC sold the building in 2022.  Do we use prior depreciation and the depreciation on the stepped-up value to determine the adjusted cost basis?  Or should the adjusted cost basis have changed to $490,000 at the time of mother's death??  All tax returns filed for the LLC from 2016 forward show the continuance of prior capital improvement depreciation and the depreciation on the stepped-up value.  Was this correct or should the depreciation have started over on the FMV of $490,000?    Also, if all depreciation was taken as straight line, will the partners have to pay a depreciation recapture tax?  The depreciation on the original value in 1968 dropped off after 39 years (in approx 2007).  Does IRS require recapture tax on fully depreciated improvements???

[tagteam · Accepted solution]

You should seek guidance from a local tax professional at this point.

At the time of your mother's passing, previous accumulated depreciation would have disappeared and the FMV, as of the date of her death, should have been used as the basis for depreciation (including the improvements).

See https://taxexperts.naea.org/listing/service/business-tax-preparation

[tagteam · Accepted solution]

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@chrissim2 wrote:

Does IRS require recapture tax on fully depreciated improvements???

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There will likely be "recapture" on the accumulated depreciation deductions that were allowed (or allowable) since the date of death. If the improvements were fully depreciated prior to death, the depreciation allowed (or allowable) would disappear at that time as they would have been stepped up to their FMV.

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@chrissim2 wrote:

.....should the depreciation have started over on the FMV of $490,000?    =

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That is the short story, yes, it should have started over at the FMV.