Step up basis of rental property after death of spouse in community property State.

[Roddog]

Husband died in 1998, home initially purchased for 90K, date of death home valued at 300k, in year 2008 the widow converted the property into a rental, she has been depreciating the property based on 60K, the estimated value of structure net of land value based on the 90K, by mistake, not the step up basis of 300K.

She sold the property last year and using her step up basis of 300K and improvements for basis of sale, the basis when reported on rental was reported erroneous.

My questions;

1. Should I be concerned about the basis, when the property was converted to a rental, I am going to add back the depreciation taken.
2. Should I amend the last two years of rental, to increase the basis to the step up basis, due to the incorrect reporting, before filing this year's return. We will file an extension and pay the tax on the sale.
3. File and show the sale with the step up basis, including improvements, and provide an explanation to list the step up basis and improvements or client keeps the records in case of questions later. Would an explanation be required with return?

I am trying to understand how to report the sale the right way, the IRS help is no longer available!

[TaxGuyBill]

Report the sale using $300,000 for the starting Basis (plus improvements), and use the full amount of depreciation which should have been claimed (probably based on $300,000, minus land).

No explanation with the tax return is necessary, just tell the taxpayer to keep the records.

Yes, if taxpayer wants to amend the last 3 years to correct the depreciation for those years, that would probably be a good idea.


Other notes: I am assuming that the FMV in 2008 was higher than the Basis at that time. If it was not, then the depreciable Basis (and the Basis for a loss) would have been the FMV when it was converted to a rental.

If taxpayer had not claimed any depreciation, Form 3115 could have been used to 'catch up' on the depreciation. However, Form 3115 can not be used in this situation because depreciation was claimed but it was a "mathematical or posting error".

[Roddog]

Depreciation amount at start of rental

Thank you TaxBillGuy! One more question, If the basis was lower than the 300k at the time of starting the rental in 1998, that was around the time the real estate market crashed. I should use the FMV at that time for depreciation on the rental and still use the step up basis at Date of Death for the sale of the property?

[TaxGuyBill]

Yes, the Fair Market Value would be used for depreciation.

The Stepped-up Basis of $300,000 (plus any improvements after that, minus depreciation lowing Basis) would be used if it was sold for a Gain. Use the FMV (plus any improvements after that, minus depreciation lowing Basis) if it was sold for a Loss. If the selling price was between those number, there is no Gain or Loss, and you sort-of need to 'make up' numbers on the 4797 to get it to show $0 gain/loss.

[Roddog]

Should the depreciation on the rental property be adjusted for the total of 8 years and the current year at the step up value of 300K minus land just on the 2017 return, not just adjusting 2017 at the current basis minus improvements for one year? Would I have to amend all the other years returns?

[TaxGuyBill]

Yes, for both the current depreciation and for the sale, you need to use the amount of depreciation that could have been claimed (the full 8 years worth).

Does that answer your question?

[Roddog]

Yes, for both the current depreciation and for the sale, you need to use the amount of depreciation that could have been claimed (the full 8 years worth).

Does that answer your question?

yes, thank you

[Roddog]

CA community property step up basis with property title tenant in common

The rental property was held in tenant In common, not community property. She would receive only 50% step up value, based on her husbands share of appreciation, not the full step up value as of deceased DOD?

I was reading about the Gallenstein rule for property purchase before 1077, Is anyone aware of this rule for automatic step up in value for property brought before 1977 or use this rule for step up value?

As the entire property passes through the estate of the first spouse to die under Gallenstein, Code § 1014 mandates a corresponding effect on the basis adjustment. Specifically, the entire interest in the property will receive a basis adjustment to fair market value because the entire interest was included in the estate of the first spouse to die. Code § 1014.
Example-Assume that the residence in the prior example was purchased in 1970. Because the Gallenstein rule applies, the entire residence will be included in H's estate for estate tax purposes and W would take a basis of $400,000 (the fair market value of the entire property at the time of H's death). The entire $400,000 reportable on the estate tax return, however, will also generate a marital deduction of $400,000, resulting in no estate tax liability on account of this asset.