A widow came to me for her taxes - her husband had been preparing their taxes previously and never took depreciation on their rental property. He passed away in 2012 and now that he is gone, the rental is no longer an active activity, but passive. I'm trying to figure out the best way to handle this going forward. Of course, she has a stepped up basis for half the property, but the missed depreciation on the other half exceeds $25,000. I have never done a 3115 for an amount over $25,000 - not sure what else is involved. They wouldn't be able to use the depreciation as a loss in previous years due to their income, nor in the current years due to it being passive. Should she just wait until she sells it and then catch up on it all at that time? This one has me a little perplexed and any thoughts are appreciated.
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First of all, the rental is, and always was, passive income based on what you say here. If losses were suspended due to income in past years, they may not be now if she can qualify for the $25K exemption. Half would be disregarded due to stepped up basis for him, but the other half can now be brought into play and possibly taken each year until used up. You need to go back and figure what they should/would have been if depreciation had actually been taken. Are you saying there were losses even when depreciation is not factored in? That sounds like it was not rented at FRV. -
A stepped up basis for half the property indicates a non community property state. Is this correct?
Was there a will and/or valid funded trust? Have you read the docs?
If there is a trust, it could be a game changer.Comment
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Thanks for the input - in previous years, the rental had a profit, but if they had taken depreciation, most years would have been a small loss (that would have been suspended due to income). The only year that the income would have been small enough to take advantage of the losses was 2012, but that was also the year that the widow hired a property manager and she is not actively involved in the rental, so the losses would still be passive. This is why I am wondering if she should just wait until the sale of the property or if I should just get it done now. I am just confused as to filing the 3115 with the number over $25,000.
As far as the "inheritance" - she is in a non-community state and the house was simply registered jointly and she inherited his half.Comment
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Maybe you should reread Burke's post:
"First of all, the rental is, and always was, passive income based on what you say here."
If they retained the right to accept or not accept tenants, approve the costs of repairs & maintenance, with or without a property manager probably makes no difference for active participation.
"she is in a non-community state and the house was simply registered jointly and she inherited his half." No Trust?
So half the property receives a step-up, the other half does not. How can you determine the basis on the inherited half without computing depreciation allowed and thus suspended losses?
MikeComment
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My Thoughts
In 2013 the widow will depreciate her 1/2 of the property and a stepped up amount that she inherited from her spouse. The prior depreciation on his half has been vaporized due to the step up. So why not do a Form 3115 on just her 1/2 and depreciate his 1/2 at the stepped up value. Hopefully her 1/2 of the depreciation adjustment will be less than 25k.
How does this sound?Comment
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I was in a somewhat similar situation with a client not deducting years of depreciation. Here is my original post:
Notice what ruth says and I was greatly helped by another forum member.
I agree with what Kram says. If applicable carry anything over $25,000 into the next year.Comment
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I think you are confusing active/passive income with active/material participation. A property manager would not change this classification if she still retains final authority to approve, etc (see mactoolsix post). Sounds like you could amend some previous years, however. How far back does this rental property go? Krambergolds' post has a simple solution to me. Perhaps her 1/2 of depr would be under $25K? If not, take the max and carry the excess over to next year.Originally posted by krav View PostComment
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Carryover?
I never said anything about carrying over that which is in excess of 25k. I said maybe 1/2 the depreciation would be under 25k. If it is not then the poster is back to square one and has to deal with a change in excess of 25k. All my form 3115 adjustments have been under 25k si I don't know how to handle a greater than 25k situation.
Here is another thought. Use a very high land value to lower the depreciable basis and thus the depreciation.Comment
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I had a Form 3115 for over $100,000. Carry over excess each year.Comment
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