Step Up In Basis Non-Community Property State

[RonCPA]

Married couple renting commercial building and reporting on Sch. E. Spouse dies and surviving spouse has to go to probate court to obtain ownership of building, as survivor was not on deed as owner, only in name of deceased spouse. Building sold in 2016, prior accountant did not step up basis after death. I want to use step up in basis and compute depreciation (allowed or allowable) to arrive at higher tax basis when reporting sale. Client does not want me to amend 3 prior years to take higher depreciation expense.

MY QUESTION: Since surviving spouse was never on deed, should they not be eligible for step up in basis to 100% of value used in probate filing, even though it was 10 years ago? Thank you.

[momona]

I am making the assumption that the wife declared the income on the rental although she did not have title to it.

Although I cannot answer your 10 year back question, I think you should do the amended returns only because the IRS says they will treat eligible property as being depreciated, whether or not you took it.

[Roland Slugg]

Client does not want me to amend 3 prior years to take higher depreciation expense.

Why not? Is he/she afraid if an IRS audit? Or is it the cost to prepare the amended returns that's the issue? If it's the former, I would explain the benefits of amending and also point out that amended returns do not usually trigger an audit.

Since surviving spouse was never on deed, should they (sic: he (or she)] not be eligible for step up in basis to 100% of value used in probate filing, even though it was 10 years ago?

Absolutely!

Since a fair amount of depreciation has been lost, but will still be treated as taken when figuring the gain on the sale, I would allocate as much of the DOD value to the land as possible.