How to depreciate foreign rental property received as gift

[nikki20201]

My mom purchased rental condo in mexico in 5/1/2004 for $40K. (Land $10K, Building $28k registration costs $2K). It has been rented out since 1/1/2006.

In 5/10/2019 she transferred the condo as gift to me. FMV on 5/10/2019 was $200K.

Her tenant switched to sending the rent to me from 6/01/2019.

My mom was citizen and resident of mexico so did not need to do US tax returns and never claimed depreciation nor had to file 709 gift tax return.

Now my Q is: I have set up a depreciation schedule in TT

A) What will be my placed in service date? her original 1/1/2006 or date when tenant started giving me rent 6/1/2019

B) What will be my Depreciation method? I believe for Foreign property placed in service before 1/1/2018 ADS 40years applies and if placed in service after 1/1/2018 30years.

C) Do I start a New 40yr or 30yr depreciation schedule from my placed in service date,

OR will it be a continuation from her date of 1/1/2006 and I lose all the theoretical depreciation which she could have taken from 1/1/2006 to 6/1/2019?

D) What will be my starting basis? (i) her original cost i.e $30K (building+registration cost) - accumulated depreciation using ADS 40years OR (ii) $30K (building+registration cost)  OR (iii) FMV $200K on date of gift 

Thank you so much.

[pk]

@nikki20201 , did your mother actually transfer title  ( Escritura ) to you or is it  just an understanding/ declaration.   If the title has been transferred -- then your basis in the property is her basis  ( in this case  acquisition basis + any improvements she  may have made  during the intervening years.  If there is no "escritura" then  you have to recognize the  rental income  but the basis will  be FMV  at her passing.

Start of service  ( if the property is in your name ) will be  the day you took possession of the property

Do you need more help on this ?  If so please answer if  you have the escritura in place and in your name--yes ? 

[nikki20201]

Yes we did a formal transfer with the municipal authorities.

[nikki20201]

Yes I have the escritura in place and in my name. Thank you for your help.

[pk]

@nikki20201  oh dear -- this means your basis is her basis, start of depreciation is  from the date of the escritura and it also means that there is going to be large capital gain when you dispose of the property because   your depreciation would reduce the basis  ( adjusted basis )  and the  price of  property going up  ( as  evidence  your mother bought it for 28K and it is now 200K  from your post ).  On top of that  the  depreciation ( whether recognized or not ) caused gain  must be taxed as ordinary income i.e. at your marginal rate.  Perhaps  considering these  future issues  you may want to consult  a MX lawyer  ( a notario ) if the  gift can be returned  because as inheritance you would be much better tax wise--- IMHO

Also note that gifts of US$100,000 or more from a foreign person must be reported  to the IRS on form 3520 --- it is not tax event though

[nikki20201]

pk thank you for replying.

# It cannot be returned because she transferred in may 2019 and passed away in early 2020.

# thank you for telling me about 3520 i will file it

# I understand whenever i sell my basis will be her basis of 28K and also all the depreciation accumulated till sell date, will be reduced from the cost.

# ok i understand for depreciation my start date will be May 2019

Qs:

# My start amount will be 28k? (do I need to not worry about theoretical depreciation between her purchase date and transfer to me? (ofcourse she never depreciated)

# is her registration cost of $2K added to building cost and depreciated or added to land cost?

Thankyou 

[pk]

@nikki20201 , I am really sorry for your loss - I know how it must hurt.   I pray for her soul.

Your basis is $28K and the transfer tax could be bakes into the basis.  You do not recognize any past and theoretical depreciation because none would have been allowed -- it was not your property till after  registration of the escritura.

Is there more I can do for you ?