Depreciation on property obtained via quit claim deed

[FEDUKE404]

BACKGROUND: Client obtained property (beach condo, short-term rental property) via a $5.00 quit claim transaction during 2013. The property was and continues to be rented in same manner as two other units in the same complex which have been in client's name only since time of purchase several years ago. FMV of the unit (land is not an issue) was likely in the range of $150k.

Question #1: What amount is used to start the depreciation meter running for the new owner? ( I have seen answers of $5, value at time of transfer, and original cost basis by the prior owners. )

Question #2: Does prior depreciation become a factor? So far as I know, the property was never used for personal use and was/is for rental purposes only.

Question #3: The prior owners are the parents of the individual. Does that change answer to either Question #1 or Question #2 ?

Question #3a: There is a possibility the prior owners were both parents AND client, who is now the sole owner. (I'm still trying to determine those prior circumstances.) How many "adjustments" to everything would be necessary if that turns out to be the case ?

Question #LEFTOVER: Well, while you're here. Client also during 2013 "bought" another similar unit for approximately half of the FMV for such properties. Sellers were the parents. What kind of issues might that raise in the overall picture here? (Yes, a "family member" is an attorney. . .)

Thanks in advance. I'm sure there are some knowledgeable folks here who can comprehend this mess far better than I can. FWIW: Due to passive loss issues, the bottom line on Sch E will be a goose egg for a long time, more or less until a property is sold. Then things could become. . .hectic!

FE

[taxea]

depreciation is his cost at time of purchase...how do you justify more than what he paid for it?

[S T]

BACKGROUND: Client obtained property (beach condo, short-term rental property) via a $5.00 quit claim transaction during 2013. The property was and continues to be rented in same manner as two other units in the same complex which have been in client's name only since time of purchase several years ago. FMV of the unit (land is not an issue) was likely in the range of $150k.

Question #1: What amount is used to start the depreciation meter running for the new owner? ( I have seen answers of $5, value at time of transfer, and original cost basis by the prior owners. )

Question #2: Does prior depreciation become a factor? So far as I know, the property was never used for personal use and was/is for rental purposes only.

Question #3: The prior owners are the parents of the individual. Does that change answer to either Question #1 or Question #2 ?

Question #3a: There is a possibility the prior owners were both parents AND client, who is now the sole owner. (I'm still trying to determine those prior circumstances.) How many "adjustments" to everything would be necessary if that turns out to be the case ?

Question #LEFTOVER: Well, while you're here. Client also during 2013 "bought" another similar unit for approximately half of the FMV for such properties. Sellers were the parents. What kind of issues might that raise in the overall picture here? (Yes, a "family member" is an attorney. . .)

Thanks in advance. I'm sure there are some knowledgeable folks here who can comprehend this mess far better than I can. FWIW: Due to passive loss issues, the bottom line on Sch E will be a goose egg for a long time, more or less until a property is sold. Then things could become. . .hectic!

FE

And I thought I had some issues with some clients!

Just thinking and to see what else might be generated as posts to your issue!

Q3 - Would this be a gift and maybe -- should there have been a gift tax return, and then he takes on donor basis for the parents amount?

Q Leftover - I do not know this at all - seems like a "crafty attorney" maybe look to related party if those rules exist in this scenario

Paying $5 gets you nowhere on depreciation Q1
Q2 if a gift would revert to the donor basis

Hopefully so others will "chime in" that would be way more knowledgeable than I am on this!

Do I dare post this "lame" response! Not much here for you -- other than maybe more thoughts and questions!

Sandy

[joanmcq]

I say gift since it was transferred at below FMV by a related party. Parent's basis. Parents cannot claim a loss.

[taxea]

I do agree...but as a gift the parents have to declare it. You need to know that it is common for quit claims to be written for only 1. Why are they doing this now? The FMV at death would be so much better for the son. What are the circumstances/reasons behind the transfer? Perhaps knowing this we could better advise you.

[FEDUKE404]

Trying to reach a fact-based conclusion so as to proceed

depreciation is his cost at time of purchase...how do you justify more than what he paid for it?

I have not "justified" anything yet. That's why I asked the original questions.

From what I have seen, however, it appears likely that $5.00 will *NOT* be the allowable basis for his depreciation.

FE

[Burke]

Sale of property for less than FMV is considered a gift of the difference between the two. Therefore, the property will be depreciated by the son using the original owners adjusted basis. (Well, I guess you can add the $5, depending on who paid it.) I think that is the concise answer to all your original questions.

I had one last year where the father gifted such rental property to the son. And I had to break down all the figures (original price, land value, improvements, less depreciation) so that he would have an understanding of how he was to treat it going forward.

[Golden Rocket]

Declare a Gift?

Why do the parents have to "declare" a gift for the donee to begin using it? I don't disagree that the parents should file a gift tax return if the value is over $13,000 but that would be
for the parents' preparer to struggle with. This "gift" should bear the same basis as it did in the hands of the donee, and he should begin depreciating at that value.

FWIW, I have had TWO clients this year voluntarily give up their timeshare property because the management and local tax assessments are higher than the taxpayer wants to pay, and he would NEVER get value if he put it up for sale. These things are running like cockroaches when you turn on the light...

[FEDUKE404]

Even if a gift, or somewhat a gift. . .

Why do the parents have to "declare" a gift for the donee to begin using it? I don't disagree that the parents should file a gift tax return if the value is over $13,000 but that would be for the parents' preparer to struggle with. This "gift" should bear the same basis as it did in the hands of the donee, and he should begin depreciating at that value.

FWIW, I have had TWO clients this year voluntarily give up their timeshare property because the management and local tax assessments are higher than the taxpayer wants to pay, and he would NEVER get value if he put it up for sale. These things are running like cockroaches when you turn on the light...

I think your observation is astute re people leaving, although this scenario is NOT a "time share" issue....the owners (via a third party) rent out the property year-round. OK, they charge a heck of a lot more in July than in December, but that comes with the beach territory.

What I see here are two likely scenarios: 1) The "$5 property" was transferred just to get rid of it. And I still am trying to figure out what to do with earlier depreciation which I have never seen, AND 2) The "other property" was apparently sold at around 50% of its current value, likely just to get rid of it but with receipt of some coinage for the trouble. Same issue re depreciation.

I still am greatly concerned that "the family lawyer" may be stirring the overall pot quite a bit, so I am treading carefully.

FE

[Roberts]

Did the child assume a mortgage or other debt outstanding?

$5 may be all the equity the parents have and is a reasonable price if the debt transferred with the property.

[FEDUKE404]

No debt

Did the child assume a mortgage or other debt outstanding?

$5 may be all the equity the parents have and is a reasonable price if the debt transferred with the property.

There was no debt assumed. Both properties had been paid for, in full, a looooong time ago.

Parents are quite well off, as is client, as is family lawyer.

FE

[Burke]

All you need is a copy of the depreciation schedule from the last tax return the parents did while they still owned the property. That gives you the original basis, and the accumulated depreciation. If they have fully depreciated it, of course, then the depreciable basis is "0." (You can find out by asking when they bought it -- the son should know that.) If that is the case, only thing left for basis would be the non-depreciable land. If they bought it in the early 80's at ACRS, that's long gone. After '86, it would run 27.5 years.

[FEDUKE404]

Chasing the prior depreciation

All you need is a copy of the depreciation schedule from the last tax return the parents did while they still owned the property. That gives you the original basis, and the accumulated depreciation. If they have fully depreciated it, of course, then the depreciable basis is "0." (You can find out by asking when they bought it -- the son should know that.) If that is the case, only thing left for basis would be the non-depreciable land. If they bought it in the early 80's at ACRS, that's long gone. After '86, it would run 27.5 years.

The high-rise (resort) was built around 2005, and depreciation for other units (owned by client) in same property is clicking along at 39 yr MACRS SL. No one is deemed to own any "land," except I guess the corporate poohbahs ?

Where things could get sticky is with the "new" depreciation on recently transferred units. If original owner's basis is twice what new owner paid for unit (let's call it a bargain purchase), then what happens going forward. "Allowed or allowable" and "old or new" issues ?

As for the $5 property, similar question. Is depreciation based upon (likely) original price or (calculated) current value which is likely closer to what the "half-price sale" represents?

And at least a small gorilla in the room: I have no idea what was shown on the prior tax returns of the original owners. . . .

Bottom line: It's gonna be confusing to have several properties, each more or less equal in size/value, possibly being depreciated at entirely different rates.

FE

[Burke]

Okay, so it's not residential rental, then. If you know it was built in 2005, and the depr was 39 years, all you need is the cost. No land involved. It's allowed or allowable. When it gets transferred by quit claim deed, (for $5), then it goes to the new owner at the original owner's adjusted basis, or its FMV, whichever is lower, since the new owner essentially paid nothing for it. That one's pretty cut and dry. That is the basis he will use for depreciation.

From your post, it looks as though another property may have been sold at a "bargain price" but was this price the actual FMV at the time? If so, the seller has a loss. If it wasn't the actual FMV, but just sold for that price due to the relationship, then a gift is involved here.

It really doesn't matter if the same properties are being depreciated at different rates if the values are different. If the original owners paid big bucks in 2005, then their basis is their cost. If it drastically dropped in value during the real estate downturn, then anyone buying it at FMV later (or receiving it as a gift) uses the lower values. The depreciation will begin on different dates depending on the dates the ownership changes.