Basis for Depreciation?

[Kram BergGold]

Mother and son (my client) owned a building 50-50. When she died, the other two brothers inherited her share. They sold their 50% of the house to my client giving him 100% ownership. However, they sold their 50% for $200,000 when it's value was $400,000. Does my client get to depreciate the amount included in the decedent's estate ($400,000) what he paid, $200,000?

[ddoshan]

It would seem on the surface that he would use the 200K he paid. The brothers that inherited their share would seem to get some stepped up basis but I don't see how that would transfer to the son who purchased their share for 200K.

[taxea]

ddoshan is correct his basis would be his 50% plus the 200K he paid for the other 50%

[Gary2]

I'm not sure I agree. It sounds like the other brothers have to do a gift tax return for the collective $200K on the below-market sale. The client might then be able to claim the full $400K as basis, plus, of course, his basis in his original 50%. That's assuming I'm reading it correctly as saying the $400K value at the time of the sale is the same as the FMV at the time of the mother's death.

I'm not totally sure about this. Pub. 551 talks about bargain purchases only in the context of discounts in exchange for services, while it talks about gifts only in the context of entire gifts.

[New York Enrolled Agent]

I'm not sure I agree. It sounds like the other brothers have to do a gift tax return for the collective $200K on the below-market sale. The client might then be able to claim the full $400K as basis, plus, of course, his basis in his original 50%. That's assuming I'm reading it correctly as saying the $400K value at the time of the sale is the same as the FMV at the time of the mother's death.

Based on the original post, I would agree with Gary2 that this is a transfer in part a gift and in part a sale.

Reg. §1.1015-4 gives the general answer:

(a) General rule.
Where a transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of--


(1) Whichever of the following is the greater:

(i) The amount paid by the transferee for the property, or
(ii) The transferor's adjusted basis for the property at the time of the transfer, and


(2) The amount of increase, if any, in basis authorized by section 1015(d) for gift tax paid.

[Burke]

Tread carefully here. This hinges on what the REAL market value of the building was. It might have had a tax basis of $400K valuation, but if that was the case, why did the brother's sell it so cheap, giving up half their inheritance?

[Gary2]

Mother and son (my client) owned a building 50-50. When she died, the other two brothers inherited her share. They sold their 50% of the house to my client giving him 100% ownership. However, they sold their 50% for $200,000 when it's value was $400,000. Does my client get to depreciate the amount included in the decedent's estate ($400,000) what he paid, $200,000?

Tread carefully here. This hinges on what the REAL market value of the building was. It might have had a tax basis of $400K valuation, but if that was the case, why did the brother's sell it so cheap, giving up half their inheritance?

It's absolutely true that the real values need to be understood correctly. But this prompted me to reread the original post. On the estate tax return (706), the rule for property held as joint tenants (as opposed to tenants in common) is that the full value of the property must be included in the estate unless you can show that the surviving joint tenant(s) acquired their interest by providing some consideration. We don't know how the mother and client acquired the property. If, for example, the mother simply added the son to the deed, there may have been no gift tax return filed, and the $400,000 on the estate tax return might represent the value of the entire property, not the mother's half.

Or there may have been a miscommunication about the prices, as in "my brother's sold me their 50% for $200,000 each", where the "each" was silent.

[Bees Knees]

I understand the case to be made that the below market sale was a gift and therefore basis should reflect the donors basis under gift tax rules. However, I could see IRS claim later that the $400,000 reported for estate tax purposes was overvalued, especially if there was no actual estate tax paid due to the exemption amount. Over valuing on the estate return with no actual estate tax liability can create a higher basis with no cost.

What was the motivation behind the gift? Why was an asset worth $400,000 sold for $200,000? Were the brothers being generous? Were they motivated by not wanting to be involved in a rental operation and discounted the sale price for a quick sale? Or were they trying to create a paper loss on the sale by over valuing the asset on the estate tax return?

Before I put $400,000 on the depreciation schedule, I would want to see an appraisal indicating the actual value, and a gift tax return indicating the difference between the purchase price and the FMV was intended to be a gift.

[ddoshan]

Not an expert on this but I can't see any way I would use 400K for the basis. He paid 200K. Am not buying into any of this gifting stuff.