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Old 03-27-2013, 10:41 AM
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Inherited Property used as a rental and then sold.

My brother and I inherited a house from my cousin in 2008. Upon her death we had the property appraised and the appraisal came in at $295K. Due to the declining real estate market here in California we made the deciscion to rent the house. In 2012 we sold the property for $200k. My accountant put the cost basis for my half at $125K and it has been depreciated since we took ownership. Why would he use $125k and not the $147500 1/2 of what the property was appraised at?



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Old 03-27-2013, 08:34 PM
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“My brother and I inherited a house from my cousin in 2008. Upon her death we had the property appraised and the appraisal came in at $295K.”========>As you can see, in general, the basis of inherited property is the fair market value (FMV)of that property on the date of death, $295K, in this case. This may be a step-up (the most common case) or a step-down. Your basis for inherited property from your cousin is generally The LOWER of the FMV (Fair Market Value) of the property at the date of the cousin’s death OR The FMV on the alternate valuation date, if so elected by the personal representative for the estate.


“Due to the declining real estate market here in California we made the deciscion to rent the house. In 2012 we sold the property for $200k. “==========>Then, as long as you sold it as rental pty, NOT as yur primary home, you need to recapture the unrecaptured depre taken previously;ALSO, it is possible to apply this tax break to rental pty; the capital gains exclusion, up to $400K for MFJ, does not apply to rental properties. It applies only to your primary home. But, you/ your bro. can turn a rental house you own into your primary home, and, by doing so, make the sale eligible for the tax exclusion. If it suits you, you can move into your rental house, live in it for two or more years, and then sell it and pay no tax on your gain if it’s under the exclusion limits. To be eligible for the exclusion, you must own and live in the house for two of the previous five years.
“My accountant put the cost basis for my half at $125K and it has been depreciated since we took ownership.”============> 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. As mentioned above, the basis for inherited property is generally the FMV of the property at the date of the decedent's death, regardless of when you acquire the property.If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.
“Why would he use $125k and not the $147500 1/2 of what the property was appraised at?”===========>Your original basis of the rental pty was $147,500;$295,000/2 after deduction of the unrecaptured depre on the rental pty, $45K, your new basis on the pty is $125K;$250K/2=$125K. And you need to recapture the unrecapture depre of $45;$295K-$250K as ordinary income taxed at your marginal tax rate as said above.



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