Welcome Guest. Register Now!

02-07-2015, 02:24 PM
 Junior Member Join Date: Feb 2015 Posts: 3
Depreciate a step-up over the remainder of the original recovery period?

Can you depreciate a step-up over the remainder of the original recovery period?

George and Martha are joint owners of 39-year depreciable property purchased for \$39,000. Every year they depreciate \$1000. After 35 years, the accumulated depreciation is \$35,000, and so their adjusted basis is down to \$4,000. George dies and Martha inherits his half of the property. The FMV at this time is \$784,000. As the full step-up in basis would be \$784,000 - \$4,000 = \$780,000, Martha's step-up is half of this, \$390,000. On which of these schedules can depreciation legitimately run?

Schedule 1: Add Step-Up as a Separate Item to Depreciate in Original Recovery Period
George & Martha's original basis continues @ \$1,000 / yr for 4 more years.
Step-up depreciates @ \$390,000 step-up / 4 years remaining = \$97,500 / yr for 4 more years.
Schedule: \$98,500 / yr (\$1,000 + \$97,500) for 4 years

Schedule 2: Add Step-Up as a Separate Item to Depreciate in New Recovery Period
George & Martha's original basis continues @ \$1,000 / yr for 4 more years.
Step-up depreciates @ \$390,000 step-up / 39 years = \$10,000 / yr for 39 more years.
Schedule: \$1,000 + \$10,000 = \$11,000 / yr for 4 years, then \$10,000 for 35 years

Schedule 3: Reset Both Basis and Accumulated Depreciation in Inherited Half
Martha's half's original basis continues @ \$500 / yr for 4 more years.
Inherited half ( \$784,000 / 2 = \$392,000) depreciates at \$392,000 / 39 yr = \$10,051.28 / year.
Schedule: \$10,551.28 / yr (\$500 + \$10,051.28) for 4 years, then \$10,051.28 / yr for 35 years.

In all cases, by the time the depreciation schedule runs out, a total of \$394,000 will have been depreciated since George's death, yet the schedules achieve this at different rates. Are all of these schedules legitimate options?

Last edited by paxsonstore : 02-07-2015 at 02:31 PM. Reason: clarify issue

02-07-2015, 07:05 PM
 Moderator Join Date: Oct 2010 Posts: 5,254
Can you depreciate a step-up over the remainder of the original recovery period?===>>>>>>>>..You would get a basis adjustment to the values as of the date of death. How the property was used doesn't affect the value to the
heirs.If the property is to be rented, then depreciation is on the new basis value , the step up value. If not rented or otherwise depreciated, then that value is the basis going forward. Any gain or loss on a future sale is based on the fmv of that date of death value. When a piece of property is inherited, it starts fresh with a new basis and new depreciation as said prerviously. The prior depreciation is simply gone with no recapture. When a taxpayer dies, no gain is reported on depreciable real property transferred to his or her estate or beneficiary. However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized.For example, you owned depreciable rental property that, upon your death, was inherited by your heir/partner. No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to you when you died. However, if you sold the property before ypour death and realized a gain and if, because of your method of accounting, the proceeds from the sale are income in respect of a decedent reportable by your son/partner, he must report ordinary income from depreciation.

George and Martha are joint owners of 39-year depreciable property purchased for \$39,000. Every year they depreciate \$1000. After 35 years, the accumulated depreciation is \$35,000, and so their adjusted basis is down to \$4,000.=========>>Correct ; the bookvalue; the cost of an asset minus the accumulated depreciation.
George dies and Martha inherits his half of the property. The FMV at this time is \$784,000. As the full step-up in basis would be \$784,000 - \$4,000 = \$780,000, Martha's step-up is half of this, \$390,000. On which of these schedules can depreciation legitimately run?========>>>>>>>>>not really; This value is estimated by the FMV at the time of george’s death, minus any estimated land value. As an example, if comparable properties were sold at that time for \$784k and \$300k of that is considered land value, the cost basis is \$784k minus \$300k, or \$484k. You may also add legal, survey and recording fees to this sum when incurred during the ownership transfer. for business use of homes or commercial rentals, the recovery period is 39 years. If the property is only partially used in conjunction with an income-producing activity, you can only deduct the percentage used for business purposes. In the previous example, if only 25 percent of the \$484k cost basis property was used as a home office, dividing \$484k by 39 years calculates the gross depreciation of \$12,410. Further multiplying this figure by the 25 percent business usage calculates your total depreciation of \$3,103.

02-09-2015, 08:42 AM
 Junior Member Join Date: Feb 2015 Posts: 3
Thanks! What about the rate of depreciation?

I should have been clearer that I am not using the term "Step-up" to refer to the stepped-up basis. Rather, this refers to the amount of *increase* in basis.

Rather than subtracting accumulated depreciation on half the property and then depreciating the entire stepped-up basis (Schedule 3 in the example), my accountant simply added the step-up as a new item (like an improvement) to the existing depreciation schedule. But he said to depreciate this over the remainder of the original recovery period (Schedule 1 in the example). That seems an awful steep rate of recovery, so I suspected that Schedule 2 might be more legitimate.

Does anyone know which of these rates of depreciation are OK?

(Assume that Martha continues the same business use of the property for 39 more years.)

02-11-2015, 02:49 PM
 Junior Member Join Date: Feb 2015 Posts: 3
Solved

My accountant re-examined the issue. Schedule 1 is too short. Schedule 2 or 3 are valid.

 Posting Rules You may not post new threads You may not post replies You may not post attachments You may not edit your posts vB code is On Smilies are On [IMG] code is On HTML code is OffTrackbacks are Off Pingbacks are Off Refbacks are Off

 Similar Threads Thread Thread Starter Forum Replies Last Post Basis step up at death question lc130 Trusts and Gift Tax Returns 2 12-03-2014 02:05 PM Non-Custodial Step Parent claiming child theoryofben Divorce Tax Issues 0 04-21-2014 02:32 PM How to depreciate: different year placed in service artm Rental Real-Estate 1 03-06-2014 11:14 PM Estate - Basis Step Up seville009 Income 0 01-09-2011 09:50 AM

 » Categories
 Individual   Corporations   Forum for CPAs   Financial Planning