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Old 03-06-2012, 12:23 AM
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Rental property basis in my estate

I own rental property that may be part of my estate. If the beneficiary of the property sells how is the basis determined? Will the years of depreciation have to be recaptured or is the the basis determined as the fair market value at the time of inheritance.



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Old 03-06-2012, 03:24 AM
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“If the beneficiary of the property sells how is the basis determined?”----> In general, the basis of inherited property is the fair market value (FMV)of that property on the date of death. This may be a step-up (the most common case) or a step-down. Depreciation claimed prior to the date of death is not a factor. Any depreciation claimed after the date of death must be considered. So it's possible for there to be a small amount of unrecaputred depre involved.



“ Will the years of depreciation have to be recaptured or is the the basis determined as the fair market value at the time of inheritance.”------->Yes.A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. Your unrecaptured depre is NOT subject to sec 1245/1250 but it is subject to 25% rate rule. So, any remaining gain attributable to unrecap depre previously taken, including S/L depre is taxed at 25% rather than the LTCG rate of 15%. When the taxpayer’s tax bracket is only 10or 15%, the depre recap will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 15% brackets and then 25% The tax basis may be reduced for any depreciation claimed on the rental schedule after the death.


Last edited by Wnhough : 08-27-2012 at 09:12 PM.


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Old 03-06-2012, 01:15 PM
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Thank you again for your help. This seems like a great "loophole" to make depreciation recapture just disappear if you want to transfer assets to your beneficiaries and not have your estate or the beneficiaries have to pay any tax on that depreciation that you were able to deduct on your return all those years.



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Old 03-06-2012, 04:31 PM
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“This seems like a great "loophole" to make depreciation recapture just disappear if you want to transfer assets to your beneficiaries and not have your estate or the beneficiaries have to pay any tax on that depreciation that you were able to deduct on your return all those years.”-----> 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 son. 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, he must report ordinary income from depreciation.



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Old 03-06-2012, 05:06 PM
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Thank you.



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Old 08-27-2012, 08:17 PM
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“I own rental property that may be part of my estate. If the beneficiary of the property sells how is the basis determined?”----> If you inherited property from a decedent who died before/ after 2010, your basis in property you inherit from a decedent is ;The FMV of the property at the date of the decedent's death or The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation. income tax is completely avoided on the appreciation in value that occurred while they owned the property. If you inherited property from a decedent who died in 2010, special rules may apply; Heirs of individuals who die in 2010 may get a full stepped-up basis, only a partial step-up in basis, or a carryover basis depending on whether the executor made a special election to avoid estate tax for the estate.

“ Will the years of depreciation have to be recaptured or is the the basis determined as the fair market value at the time of inheritance.”---->Yes.A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. Your unrecaptured depre is NOT subject to sec 1245/1250 but it is subject to 25% rate rule. So, any remaining gain attributable to unrecap depre previously taken, including S/L depre is taxed at 25% rather than the LTCG rate of 15%. When the taxpayer’s tax bracket is only 10or 15%, the depre recap will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 15% brackets and then 25% The tax basis may be reduced for any depreciation claimed on the rental schedule after the death.



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Old 04-01-2014, 09:52 PM
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Can you clarify the answer you gave in this thread back in 2012?
When asked if an heir must recapture depreciation you answered “ When a piece of property is inherited, it starts fresh with a new basis and new depreciation as said previously. The prior depreciation is simply gone with no recapture. “

Yet when asked if the years of depreciation have to be recaptured, you said: “Yes.A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. Your unrecaptured depre is NOT subject to sec 1245/1250 but it is subject to 25% rate rule. So, any remaining gain attributable to unrecap depre previously taken, including S/L depre is taxed at 25% rather than the LTCG rate of 15%.

The two answers seem contradictory, unless I’m missing something.
I inherited a farm from my grandfather that I plan to sell, and need to know whether depreciation that was taken on the buildings before I inherited has to be recaptured (and taxes on such paid) by me.



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Old 06-14-2016, 11:03 PM
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Death of rental property owner- does inheritor owe gains?

I too was CONFUSED by the answer. I saw someone else say it was a loophole- the IRS forgiving of the capital gains, and that the new owner (a child of the deceased) would not owe any that would have been due had the owner sold before dying. PLEASE CLARIFY THIS! Thanks, George



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Old 06-14-2016, 11:41 PM
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Quote:
Originally Posted by mbrother11 View Post
Can you clarify the answer you gave in this thread back in 2012?
When asked if an heir must recapture depreciation you answered “ When a piece of property is inherited, it starts fresh with a new basis and new depreciation as said previously. The prior depreciation is simply gone with no recapture. “

.
#1 Can you clarify the answer you gave in this thread back in 2012?
When asked if an heir must recapture depreciation you answered “ When a piece of property is inherited, it starts fresh with a new basis and new depreciation as said previously. The prior depreciation is simply gone with no recapture. =====>Correct;the heir?s basis, as said ,for depreciation is the FMV as of date of decedent's death or the alternate valuation date if that value was used on the decedent's estate tax return. So a question that you may raise is: What happens to the accumulated depreciation of the rental home owned by the decedent;as said, Internal Revenue Code states that the heir will receive a step-up in basis of the FMV at the time of death. The accumulated depreciation prior to the decedent's death is irrelevant. Once the property has been inherited, the depreciation schedule would begin based on the new fair market value as you said????.IN THE CASE OF gifted real property, youasa donor do not have to report income on the transaction. However, if the donee sells or otherwise disposes of the rental property in a disposition subject to depr recapture, the donee must take into account the depreciation the donor deducted in figuring the gain to be reported as ordinary income."



#2;Yet when asked if the years of depreciation have to be recaptured, you said: yes.A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1245/1250 rules. Your unrecaptured depre is NOT subject to sec 1245/1250 but it is subject to 25% rate rule. So, any remaining gain attributable to unrecap depre previously taken, including S/L depre is taxed at 25% rather than the LTCG rate of 15%. >Correct asfaras I know, aslongas your marginal tax rate is 25% or higher. I believe what I meant was that you as a done or a heir as motioned previousl in answer #1.

The two answers seem contradictory, unless I’m missing something.
I inherited a farm from my grandfather that I plan to sell, and need to know whether depreciation that was taken on the buildings before I inherited has to be recaptured (and taxes on such paid) by me.=>THEN, plz read in the answer #1;



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Old 06-15-2016, 12:09 AM
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Quote:
Originally Posted by burrpenick View Post
I too was CONFUSED by the answer. I saw someone else say it was a loophole- the IRS forgiving of the capital gains, and that the new owner (a child of the deceased) would not owe any that would have been due had the owner sold before dying. PLEASE CLARIFY THIS! Thanks, George
geenrally yes but it depends ; When a TP dies, no gain is reported on depreciable real property transferred to his heir. However, if the decedent disposed of the property while alive and, because of his method of accounting or for any other reason, the gain from the disposition is reportable by the beneficiary, it must be reported in the same way the decedent would have had to report it if he were still alive.Ordinary income due to depreciation must be reported on a transfer from an executor to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Say your GF owned depreciable rental property that, upon his death, was inherited by you. 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 your GF died. However, if he sold the property before his death and realized a gain and if, because of his method of accounting, the proceeds from the sale are income in respect of a decedent reportable by you, you must report ordinary income from depreciation.



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