Taxpayer Death-question about individual tax return and trust return

[user17760236673]

My mom passed away in July of last year. Her rental property is now held in her trust. I thought I needed to prorate the rental income and expenses between Jan-July 31 and August 1-Dec 31. Is that correct? I can prorate income and expenses, but it won't let me prorate depreciation. If I put in "I used it to July 31st", it thinks I sold the property. If I don't prorate the depreciation, it gives me a false income loss. Any suggestions on how to fix this?

[Hi Palms]

Sorry for your loss.

If the property was titled in your mom's name and being reported on her individual income tax return and then was transferred upon her passing, you would prorate income and expenses for the 2025 tax year BUT the property would have a new (stepped up basis) and the depreciation would start over with that new basis and a new holding period.

[user17760236673]

It’s always been in my parent’s name but under the trust. Both my parents have passed. The problem is TT isn’t letting me prorate the depreciation.

[DianeW777]

First, you should select to convert the property to personal use on the date of death. This will use the correct depreciation for your mother's final return. When you see the question ' This item was sold……. '  select this checkbox, then do not enter a sale date, instead select that it was converted to personal use. This should complete the rental process on the final return.

If you are the only beneficiary, then your cost basis will be the fair market value (FMV) on the date of death or other stepped up basis provided by a lawyer. If you are going to continue to rent the property, it should begin with the new cost basis and start on August 1st (per your information) as though it was never rented in the past.

You can use the tax assessments from city or county to determine the percentage of land value versus building.

@user17760236673 

[Hi Palms]

---

@user17760236673 wrote:

It’s always been in my parent’s name but under the trust. Both my parents have passed. The problem is TT isn’t letting me prorate the depreciation.

---

What type of trust. It matters. Certain trusts do not get a stepped up basis. That is unlikely here but it's a possibility. Are you preparing a return for this trust (1041)?

[user17760236673]

I am planning to file the trust return as well.  The Trust is now an irrevocable trust because my dad passed first. Mom passed in July, but the rental property is still under the trust. I just haven't moved it to my name yet, but I am the executor of the trust. I do have a bank account under the trust that collects the rent. I always have reported the income and expenses under my parents tax return, but I am unclear if I now have to file 7 months with my mom and then the other 5 months under the trust. But again, TT is not letting me split the depreciation. Do I just file everything under my mom's tax return even though she passed in July?

[Hi Palms]

---

@user17760236673 wrote:

I always have reported the income and expenses under my parents tax return

---

That could be problematic, or at least incorrect, depending upon the type of trust created and the parties (i.e., was this a joint trust or just your father's trust, was this an IDGT, etc., lots of questions). No one here can review the terms of the trust so no one here can instruct you as to how to proceed without that information (they'll try but they could very well be wrong).

At this point, based upon past procedure with you treating this as a grantor trust up until your mom passed, you might as well allocate the 2025 tax year between the January 1st through the date your mother passed and then that date through the end of the tax year (i.e., income/expenses and depreciation deduction on your mom's return until her passing, and then income/expenses on the trust return for the rest of year and a new basis (stepped up) and holding period.

I have to recommend that you engage a local professional to review the terms of the trust and how you handled matters until this time. However, failing that, you could use the procedure outlined above.

[user17760236673]

The problem is TT is NOT allowing me to prorate the depreciation. I have tried numerous methods to prorate it from Jan-Aug on my mom's return, and it either thinks I sold it, gave it away, or gives me an artificial loss. THIS is the problem I am having. 

[Hi Palms]

OK, in order to stop depreciation on your mom's return, you need to convert the property to personal use on the date of her passing. That should allow a deprecikation deduction through that date and zero for the rest of the tax year. You should see that selection in the program; that the property was converted from rental to personal use.

[user17760236673]

But it is still being rented

[Hi Palms]

I understand and you would continue to report the income/expenses and depreciation on the trust's 1041 until such time as you transfer the property to you, as beneficiary. 

The idea behind converting to personal use in TurboTax is JUST FOR TurboTax. It lets the program know that the property is no longer being used as rental property BY THAT TAXPAYER.

[user17760236673]

I assume that would be reported to the IRS, but I will look at it. Thank you for your help.

[AmyC]

You must convert assets to personal use in the property section using the date of death. This stops depreciation on the personal return. For the trust, the rental property and all assets will be added in to create the rental portion for the trust. Each time period / return type requires just the information for that time frame.

[Hi Palms]

---

@user17760236673 wrote:

I assume that would be reported to the IRS, but I will look at it. Thank you for your help.

---

You're welcome but you're wrong in your assumption; it will NOT be reported to the IRS as the only thing the IRS sees on Schedule E is the amount of depreciation you deducted for the tax year.

[user17760236673]

Thank you!