Cost Basis - Rental Property

[JohnH]

Taxpayer and his wife bought home in 1979 for $65K. In 1993 they began renting it out when they bought another home. FMV was more than $65K so they used the $65K (minus land value) as basis for depreciation. Wife subsequently died in early 2008. FMV at the time of her death was around $140K. He continued renting out the property using the original depreciation calculation. There were $10K of capital improvements along the way, duly accounted for. He sold the house in 2015 for $150K.

So I'm thinking his cost basis is the original $65K plus the $10K of capital improvements, plus $70K (her half of the stepped up basis) for a total of $145K. We still have to adjust the 4797 for depreciation allowed/allowable, of course. But am I on track with the basis calculation? Thanks

[TaxGuyBill]

It starts with $32,500 (his half of the basis) plus $70,000 (her stepped up basis).

If any of the improvements were before her death, 'her half' disappears because it is absorbed into the $70,000.

As you indicated, you need to determine what the depreciation allowable would have been if they had properly depreciated it.

I am assuming this is not a Community Property State? If it is a Community Property State, they get a FULL 'step up' on her death.

[Maude Lebowski]

Not quite

His basis is 1/2 of the original basis of $65K or $32,500 plus 1/2 of FMV on spouse's DOD or $70K for a total basis of of $102,500.

Not sure if the $10K was spent before or after her death, so adjust accordingly.

Unless the clients lived in a community property state. Then 100% of basis is stepped up to DOD FMV.

[JohnH]

Wow! Thanks for catching my mistake. That was a classic double-counting error. Just goes to show the spreadsheet is only as good as the designer. I appreciate the quick response. (We are not a community property state, so I'm ok there) anyhow, it's far better to have some egg on my face on this forum than to be explaining my $30k+ mistake to the client in an audit