Depreciation of Rental Properties - Deceased Spouse

[Yardley CPA]

Longtime client, husband and wife, MFJ.   They have three rental properties (one of the properties began renting in 2014, the other two are at least 20 years old each).  The wife passed away in April, 2016.  For the 2016 return, do I split each of the rental properties into two assets, with the deceased wife's half receiving 50% step up basis, starting on the date of death?  The husbands half would continue as is, with the cost basis and accumulated depreciation cut in half, correct?

Can you provide any info on how to achieve this in ATX?  Do I "sell" half of the property to stop the depreciation? And add a new asset for the wife's stepped up basis?

Any insight would be greatly appreciated.

Thank you.  -

[Pacun]

No. No step up basis on rental.

[Terry D EA]

Pacun I respectfully disagree. Below is a section from Pub 551 Basis of Property. Yardley CPA, I see you are in PA and I am assuming the rentals are not in a community property State. I would take some time to research a bit further but everything I have looked at leads to the same example as in the pub. There are also examples of how to begin the depreciation on the new basis as well. Based on your statement of two properties being 20 years old, I am assuming they are not depreciated out. However, the depreciation taken before the death of the spouse will be used to determine the new basis. I have not used ATX for a number of years now so I can't help you with the proper way to handle it. Maybe Jack or someone still using ATX will chime in and help.

Property Held by Surviving Tenant

 

The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety.

Example.

John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. John furnished two-thirds of the purchase price and Jim furnished one-third. Depreciation deductions allowed before John's death were $12,000. Under local law, each had a half interest in the income from the property. At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Jim figures his basis in the property at the date of John's death as follows:

Interest Jim bought with his own funds—1/3 of $30,000 cost	$10,000
Interest Jim received on John's death—2/3 of $60,000 FMV	40,000	$50,000
Minus: ½ of $12,000 depreciation before John's death		6,000
Jim's basis at the date of John's death		$44,000

If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death.

If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property.

[DANRVAN]

5 hours ago, Pacun said:

No. No step up basis on rental.

Why?

[jklcpa]

Terry has it correct. In a noncommunity property state, the husband would retain his basis that relates to his half, and then he gets the stepped up basis at 1/2 of the total FMV, and depreciation starts over from the beginning on the inherited portion. I think the code sec you are looking for here is 1.1250-3(b)(2), but check that for sure. I'm on my tablet right now and is not as easy to look up to verify.

As far as ATX, I don't know that there is any easy way to handle this. You'd have to reduce each of the existing components' cost, accumulated depreciation and NBV by half, and then add in the other half of each component that is inherited.  For the components that still have depreciation deduction available to take, you will probably have to override the calculations because the depreciation should be a full year's amount prorated for the period before the death. It would be an incorrect calculation to use a sale date if there are any assets using a half-year method, but those using mid-month would be closer to accurate. Also, for the inherited portion, check me on this, but I think you can use the DOD as the starting date to calculate the expense. However, if sold within a 12-month period, the taxpayer would get long-term treatment, so that is something to watch out for with that date of death in the system as the "acquisition" date.

I think I'd attach a note of explanation of how and why the cost and accumulated depreciation were reduced by half due to the spouse's death and how the year's depreciation was calculated. 

[DANRVAN]

8 hours ago, jklcpa said:

Also, for the inherited portion, check me on this, but I think you can use the DOD as the starting date to calculate the expense.

I agree, that is how I do it. However, there is another layer to this.  That is the depreciation from the first of the year to date of death using the original basis and asset lives. Then from DOD on you will have the split basis as Terry described.

I don't  keep permanent record of depreciation on ATX, I use the depreciation module on EasyACCT. That makes it a lot easier in situations like this.

[Yardley CPA]

Thank you all for chiming in.

I live in Pennsylvania but the client lives in New Jersey.  Two of the older rentals, over 20 but under 27.5, are in New Jersey as well.  The newer rental is in Florida. 

New Jersey is an equitable distribution state.  I believe Florida is an equitable distribution state as well.  How would this change things?  Any ideas? 

Thank you again.

[jklcpa]

2 hours ago, Yardley CPA said:

Thank you all for chiming in.

I live in Pennsylvania but the client lives in New Jersey.  Two of the older rentals, over 20 but under 27.5, are in New Jersey as well.  The newer rental is in Florida. 

New Jersey is an equitable distribution state.  I believe Florida is an equitable distribution state as well.  How would this change things?  Any ideas? 

Thank you again.

 

The advice you've been given is for equitable distribution states, so you are safe to follow what's been said here. It would only have been different if the states were community property states.

[SaraEA]

I did one of these this year for a couple who had 12 rentals.  I did a "mass" out-of-service for most assets for the date of death.    That way they got the partial-year accurate depreciation.  I then re-entered them as "wife's original half" with her 1/2 basis and 1/2 depreciation and "inherited half" with the step-up basis for the deceased husband's portion.  I left things like new carpets, appliances, etc. alone and depreciated them as usual, thus addressing Judy's concern about assets using the mid-year convention.   These assets certainly did not appreciate in value by the time of death, and it would be ridiculous to try and separate them from the date of death appraisals (which certainly did not say "building worth x, but only worth y without a stove").  For major assets, however, she continued with her original basis and depreciation while his got rolled into the date of death value.  Maybe a crude example will help:

Building:  Original cost $100,000, depreciation taken $80k.   DOD value $150k

Furnace:  Original cost $20k, depreciation taken $5k

Stove:  Original cost $700, depreciation taken $200

Wife's original half:  Building $50k, $40k depreciation; Furnace $10k, $2500 depreciation

Inherited half: $75k (includes building and furnace, which is part of the building in the appraisal)

Stove retains its cost and prior depreciation. 

I'm not sure this method is right, but I'm comforted to know that all items will eventually be depreciated.  The only issue is the matter of timing.  I don't think the IRS will argue about when the relatively few bucks of stove depreciation get counted.

[Abby Normal]

17 hours ago, SaraEA said:

"mass" out-of-service

How, exactly, is this done?

[SaraEA]

I use UltraTax for tax prep.  In the asset portion you can choose "mass disposition" or "mass out of service."  Comes in handy when someone sells a rental or business property, or in this case the asset bases change.  If ATX doesn't offer that option, you'll just have to take each asset out of service on the date of death (not the mid-year convention ones though) and enter two new assets for each one (one with 1/2 original basis and depreciation; the other with 1/2 DOD value).  Good thing it's late November and there is time to do things like this.

[Abby Normal]

There's a lot of things that ATX fixed assets doesn't do.

[BulldogTom]

On ‎11‎/‎17‎/‎2016 at 0:19 PM, Abby Normal said:

How, exactly, is this done?

There is a similar feature in ATX.  It is called a "Bulk Disposition".  I am not at my software, but I think I recall it is in the assets module.  You can add all of the assets in the group (like the building, land, appliances, improvements, etc on a rental) and sell them in one transaction.  ATX does all the calculations for you.  It is pretty slick.

Tom
Newark, CA

[RitaB]

2 hours ago, BulldogTom said:

 It is pretty slick.

You're pretty slick. 

[Abby Normal]

If you dispose assets in ATX, it will also report losses on 4797, which is incorrect in this case, because nothing was disposed.

[Yardley CPA]

Thanks very much for all your input.  Much appreciated.

Happy Thanksgiving!

[Burke]

On ‎11‎/‎19‎/‎2016 at 2:15 PM, Abby Normal said:

If you dispose assets in ATX, it will also report losses on 4797, which is incorrect in this case, because nothing was disposed.

I believe there is a box to check to tell it not to report gain/loss on 4797.