Need Help Big Time

[Gary]

Please Help.

I have a client that has a real estate rental property in Arizona, a community property state. since 1995. The property was titled as "joint tenants with right of survivorship and not as community property estate and not as tennant in common". In December 2003, her husband died. Thus, I assume that she gets a step up in basis on her husband's half of the property. She refinanced in early 2004, so I have a new assessed value of the property just a few months after he died. I presume I can use this value to calculate the step-up basis for his half.

I should have changed the basis of the property for purposes of depreciation in 2004 but I negleced to do so. (would I have to change the basis in 2003 since he died in December? - I hope not). In any case, i assume I have to amend the 2004 return (if not the 2003 return).

When I change the basis for depreciation for 2004 (or 2003), I assume I need to keep track of the previous depreciation on the original basis. Somehow, on the sale, i need to recapture the depreciation taken up through 2002 (or 2003) plus the depreciation on the rental with the stepped up basis on her deceased husband's half until the sale.

Please give me any advice that you can.

I'm ready to go back on retirement. It seems like every time I finish a complicated return, I get one more complicated. I now have to possibly represent a client that claimed $16.000 of "job-hunting expenses" on schedule A which was disallowed by the IRS. I think most of the expenses were local car mileage, and I'm sure he doesn't have any written evidence ( this was not my client- yes, it was an H&R block employee, but don't criticize- believe me, I understand the problem. What is even worse is that he had $17000 of job-hunting expenses in 2002, but the IRS has not yet picked up on this).

I am looking forward to the end of tax season, when I can go back to my music full-time. I know that most of you work year-round, and can't relax after April 17, so I understand your work does not end. In any case, if you can help me, it would be greatly appreciated.

Thanks for putting up with my ranting and raving.

Gary

[Snaggletooth]

Very Little Help

Not being from a state which could have such an arrangement, I'll assume you're on the right track. But if indeed you get one-half of a stepped-up basis, then I think the depreciation should be cut in half. Example: prior to death, original value of $100,000, accumulated depreciation of $30,000, but FMV of $250,000. The wife's part prior to death would be: original value, $50,000, depreciation $15,000. The entire step-up is $250,000 minue $100,000, or $150,000. Half of this is $75,000.

The new statistics for this property to the survivor: Original value $125,000 ($50,000 plus $75,000), and accumulated depreciation $15,000. Gary, I'm thinking if I use illustrative numbers, someone will read this thread, gyrate the numbers independently, and correct me if I'm wrong. I've never had to do a return from a community property state.

With respect to the Job Hunting Expenses, I think the best anyone can hope for is that these ridiculous claims are for total job expenses and have been mis-labeled as Job Hunting Expenses. A pre-audit conference with this client is an absolute must. He should carefully construct records of where he went, whom he interviewed, etc. and if possible produce corroborating evidence such as offer/rejection letters, etc. I'm sure he won't be able to product $16,000 worth of evidence, but he should be able to come away with a few dollars.

Gary, I hope others will post. I'm looking forward to some music after April 15th as well.

[Snaggletooth]

Y'all Come!

OK guys and gals! I'm ready to hear some more answers to Gary's half-stepped-up basis question. One of the our best ever, Burton Koss, has been on the board tonight and has elected to respond to other questions. Would love to hear from him or others.

I'm posting this to bring the question to the front again.

[jainen]

Think of this

Think of this as a capital improvement, and depreciate the stepped-up basis as a separate asset. Snag's numbers are almost right, you just need to split them. The wife's half continues to depreciate 50K over the remaining life, with 15K already taken. The new half is $125K over a new life. This works the same in non-community states.

[S T]

Community Property

Gary, I don't know if Arizona has the provision, but Calif has a provision that if h/w as joint tenants, have an agreement it can be considered community property. You might want to check it out.

Here is an excerpt from California community property

Community Property
This option is available to husbands and wives only in community property states. California is a community property state. Each spouse owns half the property and can pass it on by will either to the surviving spouse or someone else.
A special advantage to community property title is that when willed to a surviving spouse , a new stepped-up basis at market value is assigned on the date of death.
This stepped-up basis advantage is also available to husbands and wives holding joint tenancy titles in community property states. It requires spouses to acknowledge in writing to each other that their joint tenancy property is also community property.

See Rev Ruling 87-98 as well.

Here is another link that might help you as well http://www.findarticles.com/p/articl...1/ai_103088818

Sandy

[Gary]

Gary, I don't know if Arizona has the provision, but Calif has a provision that if h/w as joint tenants, have an agreement it can be considered community property. You might want to check it out.

Sandy

Sandy:

I would have done this, except the Title specifically says "joint tenants and not as community property". Do you think AZ provisions would override the statement in the Title?

Gary

[Bird Legs]

Community Property

In a community property state, the entire property gets the stepped up basis.
All depreciation taken up to date of death evaporates into thin air. Never to be heard from
again.
Start depreciating again at the FMV at date of death.
This could be in error, however, this is my thinking on this.

[Bird Legs]

Basis

See TTB page 21-28. Joint Tenancies-General Rule. Unless the surviving joint tenants can prove they provided consideration for their shares, the entire value of property held in joint tenancy is included of Form 706 and receives stepped up basis.

[Gary]

Depreciation

In a community property state, the entire property gets the stepped up basis.
All depreciation taken up to date of death evaporates into thin air. Never to be heard from
again.
Start depreciating again at the FMV at date of death.
This could be in error, however, this is my thinking on this.

Bird Legs:

Thanks for your reply, and all those that preceded yours. Do you have a reference for the statement that depreciation up to the date of death disappears? I never heard of this. Also, Form 706 was not required and thus not filed. TTB 21-28 doesn't refer to my case, where the husband and wife were joint tenants but the Title specifically stated "and not community property". I really would like to take the full step-up. Also, i would like for the depreciation to disappear, if you can give me a reference for this.

Thanks,

Gary

[Bird Legs]

Gary,

my mind is a little mushy right now. You might try IRS Pub 551.
Have done this many times where client inherited rental property. The prior depreciation
floats off into thin air and you start all over again with the fmv.

[S T]

Depreciation Start Anew

I have done it also, but it was a result of A/B Trust, form 706 was filed, and step up basis.

Sandy

[JG EA]

Note this

Bees Knees answered a question about stepped up basis and depreciation that you may need.

http://www.thetaxbook.com/forums/showthread.php?postid=7731#poststop

JG