Appraisal on rental property for step up basis

[nwtaxlady]

My Client owned 50% of alot of triplexes together with his father. Father passed away in 2023. Client got certified appraisals on these rental properties and I got to reading thru them.

My client did not keep these properties up. They are in need of major repairs. And thru the years, I would go thru each unit with my client and ask if so and so unit is rented out yet. He would say no. There are certain units that have not been rented out for 6-10 yrs now because they are unhabitable and need a lot of work. My client has no motivation to get these units back into shape to rent out.

So I read thru the appraisals and they have rental income on EVERY UNIT. Lets just say each unit is rented for 1,100 times 4 units for 12 months, then that would be 52,800 for the year on ALL 4 units. This client has only been renting 2 of the units for a long time. The other 2 are unhabitable as they need major work done.
so the appraisal calculates this monthly rental income by a Gross Rent Multiplier and comes up with an appraisal value and the notes do say this GRM rate was selected since the subject is a mid-life triplex with dated appeal and deferred maintenance. ok. ALSO the appraisal noted that this was a drive by appraisal.
I called the appraiser and asked him some questions. Of course, I asked if he walked inside all 4 units and he said no, he was asked to just do a drive by appraisal. I then pointed out about the monthly rent calculation on all 4 units when ONLY 2 are rentable and the other 2 are Unhabitable. I asked if that was the case, then would that change this appraisal value? He said yes.
Also that the monthly calculation should have been on ONLY the 2 UNITS that ARE actually rented out. (And I have many years tax returns showing that.)


That said, what do I do? In my clients file going back 10+ years I have notes about these specific triplexes, that he is only collecting rent on certain units. I ask him every year, is unit B and C rented yet? Same answer every year. Just haven't had time to deal with them. So My client is only collecting and has been only collecting rent on 2 units for many years now.

So again, my client owns 50% interest with his dad. HIs Dad died in 2023 and now he inherited his dads and gets step up in basis.
What do I do with these appraisals that might be over valued?

Of course my client wants the higher step up in basis, but as it is, he barely shows a profit between all his rentals.

What do I do? TIA

[FEDUKE404]

Just curious: How many rental properties have you been including on Schedule E, and how many properties have you been depreciating each year?
"Available for rent" can be a major factor in many ways. . .

[New York Enrolled Agent]

What do I do?

All I can think of is Juliet, Act 2, Scene 2 "parting is such sweet sorrow". Who needs this aggravation - cut the engagement now.

[TaxGuyBill]

they are unhabitable


Of course my client wants the higher step up in basis

I'm not quite sure what you are asking. If they are "unhabitable", they are not rentals (not ready-and-available for rent). No expenses for those units should be on the tax returns.

Yes, inherited property gets that portion of a step-up in Basis. But depreciation is only for the properties that are "placed in service" (ready-and-available for rent; habitable).

[DoubleO]

Is he now selling the units, or are you worried about the basis for when he does sell them? If selling now, perhaps the agreed upon selling price would give an indication of true value.

You say triplexes, then the example uses 4 units. Was that just an example you made up instead of saying TP rents 2 of 3 units in the triplex? Or is TP only renting one unit in two different triplexes? If you feel value is truly overstated, I would ask him to have the appraiser to reevaluate based on deteriorated conditions of the other units.

[DoubleO]

Part of my response got cut off. Do remember Tp’s bases in triplexes only get the stepup for half of the increase in value. As others have said, you will only depreciate units actually in service or rentable. I would still be concerned if you think the value is grossly overstated for both depreciation and selling issues. These come back to bite you later.

[nwtaxlady]

Just curious: How many rental properties have you been including on Schedule E, and how many properties have you been depreciating each year?
"Available for rent" can be a major factor in many ways. . .

they are actually four plexes. So in the case of one four plex only 2 of the 4 units have been rented in say last 10 yrs. So every year, when I got thru the expenses Say for the property taxes, I divide it and for the 2 units that are NOT rented out I add to basis and put those expenses on the depreciation schedule and list it as Unit C NOT IN SERVICE with NO depreciation until he places them into service.
These 2 units are not available therefore the expenses pertaining to them are NOT on SCH E. They are capitalized.

[nwtaxlady]

Is he now selling the units, or are you worried about the basis for when he does sell them? If selling now, perhaps the agreed upon selling price would give an indication of true value.

You say triplexes, then the example uses 4 units. Was that just an example you made up instead of saying TP rents 2 of 3 units in the triplex? Or is TP only renting one unit in two different triplexes? If you feel value is truly overstated, I would ask him to have the appraiser to reevaluate based on deteriorated conditions of the other units.

Sorry, they are FOUR PLEXES with only 2 unites rented out of 4.

[nwtaxlady]

Is he now selling the units, or are you worried about the basis for when he does sell them? If selling now, perhaps the agreed upon selling price would give an indication of true value.

You say triplexes, then the example uses 4 units. Was that just an example you made up instead of saying TP rents 2 of 3 units in the triplex? Or is TP only renting one unit in two different triplexes? If you feel value is truly overstated, I would ask him to have the appraiser to reevaluate based on deteriorated conditions of the other units.

No NOT selling. He already owned 50% NOW he has inherited his dad's other 50%. So my question is about his step up in basis. He got the properties appraised. I got to reading thru the appraisal report and how they come up with a value is by monthly gross rental income. The appraiser has ALL FOUR UNITS collecting $1,100 each with a total of 4,400/monthX12=$52,800 a year for rental income. then they take that number and multiply it by a factor and come up with a value. MY CONCERN IS, if 2 of the units is not habitable and have not been for about 10 years, then is this appraisal overvalued?
The appraiser notes do say it was a drive by appraisal and assuming all units are in average condition. So how is this addressed on the depreciation schedule for his step up in basis?

[TaxGuyBill]

appraisal report and how they come up with a value is by monthly gross rental income.

how is this addressed on the depreciation schedule

Was this filed as a Partnership? Or each on their own 1040s?

That appraisal seems to be appraising the Partnership Interest value, not the property itself.

You are asking about depreciation, which has nothing to do with the kind of appraisal that you received. For depreciation, you need an appraisal of the FMV of the property itself (resale value), not anything connected with the rental income.

[nwtaxlady]

Was this filed as a Partnership? Or each on their own 1040s?

That appraisal seems to be appraising the Partnership Interest value, not the property itself.

You are asking about depreciation, which has nothing to do with the kind of appraisal that you received. For depreciation, you need an appraisal of the FMV of the property itself (resale value), not anything connected with the rental income.

ok... yes, I just read the sales approach with comparisons to others and the appraised value is $740K. so if my client already owned half and he is inheriting half then for this particular FOUR PLEX, only 2 units are and have been rented in the past 10 yrs. NOW my question is, how do I put that on the depreciation schedule? Remember, he already owns half and now he inherited half at the stepped up basis.

Part 2 is. Do I list Unit A, Unit B, Unit C Unit D separately has he B and C are unhabitable and not available for rent and havent been.

[TaxGuyBill]

You client will continue to depreciate his original portion (50% of original purchase price, then as separate assets 50% of any improvements).

Then he starts a second depreciation asset for each rental for 50% of the FMV. However, if the appraiser did not look in the home and "assumed" it was all in average condition (even though some units are inhabitable), the appraisal doesn't seem particularly useful because the amounts are likely wrong.

Yes, you only depreciate the units that are ready and available for rent. While there are a couple of options for how to do it, in my opinion listing each unit separately is probably the best (it will make it easier if and when the other units become rentals).

[nwtaxlady]

Was this filed as a Partnership? Or each on their own 1040s?

That appraisal seems to be appraising the Partnership Interest value, not the property itself.

You are asking about depreciation, which has nothing to do with the kind of appraisal that you received. For depreciation, you need an appraisal of the FMV of the property itself (resale value), not anything connected with the rental income.

They filed their own Sch E's on their own 1040's. I use Lacerte and Lacerte has a function to input everything at 100% and then only take 50% . Then I give extra copy of Sch E to give to the Dad for his taxes.