Jointly Owned Step Up

[Corduroy Frog]

Husband and wife jointly own residential rental property, when husband dies.  It is my understanding that the surviving wife gets one-half of a step-up.  But what about depreciation?  Is it reduced by half?

Example:  Original cost for the property was $100,000, and it has incurred $30,000 in depreciation over 9 years of life.  FMV at time of death was $180,000.  Surviving wife gets 1/2 of step up, or $140,000 as new undepreciated basis.

Which of these is correct?

1. Wife must maintain $30,000 accum depreciation and must continue completing the remaining 19.5 life.
2. Wife must maintain $30,000 accum depreciation and starts all over again with 28.5 yr life.
3. Wife reduces accum deprecation down to $15,000 and must continue completing the remaining 19.5 life.
4. Wife has no accum depreciation at all, and starts all over again with 28.5 yr life.
5. None of the above.

Thank you in advance.

 

[jklcpa]

Answer 3, sort of:

This answer may differ in community property states. I'm not in one or near one, so won't provide that here. In equitable distribution states-

Decedent's share of property that is inherited gets stepped up, existing accumulated depreciation is wiped out, and depreciable life starts over at 27.5 years residential, or the 39 years for commercial. This also means there is no recapture. 

For the 50% portion of the property that already belonged to the survivor, that basis remains intact as does the 50% share of depreciation and its remaining depreciable life. This means that the overall depreciation of the entire property is calculated in two halves. It's like having two separate assets to depreciate.

Other things about this situation: If the property has carryover losses, both halves are available for use in the year of death. In subsequent years, only the surviving party's share of the loss carryover will remain. In other words, the decedent's 50% share of the  loss carryover dies with the death, but is available for use in the year of death, the same as how capital loss carryovers work for a married couple.

 

[Corduroy Frog]

Great answer Judyl  Thank you.

[TAXMAN]

Would this apply where husband ran the farm and dies. Step up half of everything and start depreciation again?

[jklcpa]

57 minutes ago, TAXMAN said:

Would this apply where husband ran the farm and dies. Step up half of everything and start depreciation again?

More information is needed to answer that:

Who ran it wouldn't govern for estate purposes. Was it titled solely in husband's name for 100% of its inclusion in his estate, or 50-50 with spouse?

Community property state?

[TAXMAN]

Separate property state. Husband owned all property. Wife sold all farm equipment and retained land  within 3 months date of death. would it be pushing to step up basis to sale price and have no gain?

[DANRVAN]

2 hours ago, TAXMAN said:

Separate property state. Husband owned all property.

I would check with the attorney for the estate.  There might be other factors to consider and state law; like how and when the property was acquired.

[michaelmars]

If the wife inherited the property then its gets a step up to DOD value, however, if sold within 6 months the IRS will generally use the sales price as estate value.  

Usual results when inherited property, including stocks, gets sold is a small loss for transaction costs.