rental property basis w/ step up

[kathyc2]

I think I may be doing something wrong here, so can someone check me?

H/W had house that was primary residence, cost basis of 55K. He died in early 2009, and she started renting it out later that year. To date she has taken ~15K depreciation leaving basis of 40K.

If the house was worth 125K when he died, do I take 1/2 of that (62.5K) less 1/2 original cost 27.5K and add that 35K to her basis to calculate gain?

[Roland Slugg]

Looks like you have totally ignored the increased basis for depreciation purposes.

When H died, W's new basis became $90k, and if it's a community property state and the house was titled as community property, the basis became $125k when H died. When she started renting it out, the basis for depreciation purposes, as well as figuring loss (but not gain) on its eventual sale, was the lower of its tax basis or its FMV at that time.

If there has been too little depreciation taken, that will have to be addressed.

[Kram BergGold]

One Point of Disagreement

Basis is $90k for computing depreciation (less land value), loss, and GAIN.
This is not a situation where basis for gain is different than for loss.

[kathyc2]

Yeah, after I posted I realized that I missed the boat by not stepping up basis when converted to rental.

However, in this case it didn't make any difference. Her AGI was below taxable income for every year and the add'l depr would not have had a benefit.

Using the basis of actual depreciation taken she would have a loss, but since the sale is going to be to a related party, no effect. If I use the add'l "allowable" there is a small gain but it is still below the taxable income amount.

Guess I lucked out on this one!

[Roland Slugg]

Basis is $90k for computing depreciation (less land value), loss, and GAIN.
This is not a situation where basis for gain is different than for loss.

O'contraire. When personal use property is converted to business or investment use, its basis for figuring depreciation as well as for figuring loss is the lower of: (1) its basis for figuring gain or (2) its FMV on the date converted.

These rules are contained in the Code and Regs, of course, as well as in various IRS Pubs, including Pub 523, Pub 544 and Pub 551.

[TaxGuyBill]

O'contraire. When personal use property is converted to business or investment use, its basis for figuring depreciation as well as for figuring loss is the lower of: (1) its basis for figuring gain or (2) its FMV on the date converted.

As Kram said, THIS is not situation where they are different. The FMV was higher (roughly $125k) than the Cost Basis ($90k, after the step-up in basis), so as Kram said, the basis of $90k is used for depreciation, loss, and gain.

[Roland Slugg]

It's always a good idea to actually READ the facts stated in someone's OP. In this case the OP states that the property's FMV was $125k as of H's DOD. It then goes on to say ...

... she started renting it out later that year.

The year involved was 2009, and in 2009 real estate values were in free-fall in many parts of the country. Accordingly, when the W started renting the property, there is a good chance its FMV was lower than it was on H's DOD, and if it was, then the basis rules for calculating both depreciation and loss, as stated in my first two posts above definitely do apply.

[TaxGuyBill]

It's always a good idea to actually READ the facts stated in someone's OP. In this case the OP states that the property's FMV was $125k as of H's DOD. It then goes on to say ...

The year involved was 2009, and in 2009 real estate values were in free-fall in many parts of the country. Accordingly, when the W started renting the property, there is a good chance its FMV was lower than it was on H's DOD, and if it was, then the basis rules for calculating both depreciation and loss, as stated in my first two posts above definitely do apply.

Yes I saw that. I don't know all places in country, but despite values going down, they weren't falling that fast anywhere that I know of (28% in less than a year, perhaps just a few months). That is why I agreed that Kram is [probably] correct.