Deceased child left rental to parents

[AZ-Tax]

New Client for tax year 2011 yet to be filed: Child (never married) died in Mar 2010. For 2010, Child's estate & personal representative (mother of child) filed form 1041 (decendent's estate) that included Schedule E rental placed in service Nov 2010. Rental cost basis $220K. Parents continued to rent property until Nov 2011 when they sold it for $248K. I am now preparing the parent's personal 2011 tax return. Do I create a new Schedule E on the parents return continuing the rental income exps including a new asset using the $220k cost basis to be used to calculate any depreciation recapture and any gains? Or do I use the FMV as of the child's date of death for the cost basis?

[appelman]

Use FMV at date of death

It is not clear why the estate 1041 had a Schedule E, unless the estate was continuing to rent the property after the owner's death and before the transfer to the parents. In that case, the estate should also have used as basis the FMV at date of death. Perhaps that is what the 220K is? And what happened between March and November of 2010? Depreciation starts over at DOD. Prior depreciation simply disappears.

[AZ-Tax]

More info including answers to questions

It is not clear why the estate 1041 had a Schedule E, unless the estate was continuing to rent the property after the owner's death and before the transfer to the parents. In that case, the estate should also have used as basis the FMV at date of death. Perhaps that is what the 220K is? And what happened between March and November of 2010? Depreciation starts over at DOD. Prior depreciation simply disappears.

$220K was the cost basis used on the Schedule E attached to the form 1041 deceased's 2010 estate tax return. Dont know if that was the FMV at DOD. Between March and November the property remained a residential except the resident died on March 2012.

I recall the prior depreciation also disappears for capital loss carry over remaining balance. In this case the deceased has about $60k of sch D losses on his 2010 final individual return with no off setting gains

[Burke]

$220K was the cost basis used on the Schedule E attached to the form 1041 deceased's 2010 estate tax return. Dont know if that was the FMV at DOD. Between March and November the property remained a residential except the resident died on March 2012.

I recall the prior depreciation also disappears for capital loss carry over remaining balance. In this case the deceased has about $60k of sch D losses on his 2010 final individual return with no off setting gains

The resident died March 2012? What resident? Not sure what is going on here. Per OP, deceased child died March 2010. Administrator shows rental property on 1041 eff Nov 2010. Does this mean the child lived in the house as his principal residence, and they starting renting it out after his death (perhaps because it did not sell)? Did repr elect fiscal year? Or calendar year? Cost basis is FMV at DOD, what ever that was. Was house/rental property distributed to parents per the will or operation of law? Was estate closed? If not, sale of rental property goes on 1041 and passes thru to bene's.

Schedule D loss carryover is lost if any amount exists after using max $3K on final return (2010.)

[AZ-Tax]

Answers for Burker

The resident died March 2012? What resident? Not sure what is going on here. Per OP, deceased child died March 2010. Administrator shows rental property on 1041 eff Nov 2010. Does this mean the child lived in the house as his principal residence, and they starting renting it out after his death (perhaps because it did not sell)? Did repr elect fiscal year? Or calendar year? Cost basis is FMV at DOD, what ever that was. Was house/rental property distributed to parents per the will or operation of law? Was estate closed? If not, sale of rental property goes on 1041 and passes thru to bene's.

Schedule D loss carryover is lost if any amount exists after using max $3K on final return (2010.)

Yes, this was childs residence prior to death. House remained empty until Nov 2010 when it was turned into rental. 2010 form 1041 was filed calendar year with Dec 31st, 2010 ending date. Its my understanding the estate was closed. The deceased did not have "Will" but the parents tell me they were the next of kin therefore inherited by default.

Burke, hope this helps and thanks for your help.

[Burke]

Ok. I am not sure why the rental was ever on the 1041 estate return. If there was no will, and the parents inherited the property by operation of law, it became their property immediately upon the child's death. Therefore, it should have been on their 2010 tax return, not the estate's. Hopefully, everything passed through via K-1 to the parents. Be that as it may, assuming the estate was closed out by December 2010, all 2011 rental income and expenses should go on the parents' return. The fact that the deceased's name and SSN are on the 1098's is immaterial. Put it on the parents' return, on the line which indicates no 1098 received (Sche E or Sche A for the non-rental interest.)