How to find the Basis on Rental Homes

[JustMeUC]

I would love it if someone knowledgeable could help me out with this...

My Dad's dad, transferred property and a house over to him about 15 years ago. My dad transferred part of the land and the house over to me about 2 years ago.

My mom's mother, transferred property and a house to her about 10 years ago, then my mom passed and it went to my dad and when he transferred the other house to me, he did this one also.

I placed both houses with a property management company late last year and they have been rented out all of 2012. I am thinking that I should depreciate them, but seems I have to determine a basis. I read that it has something to do with how much you paid but no money has changed hands on one of these properties since the 1930's and over 100 years on the other so that is not helping me... Is the basis the FMV on the day my dad transferred them to me?

Or, is it even worth doing? The land is the most valuable thing (which I can't depreciate) while the property tax listing on both houses is only about 100K.

 

[GrayHare]

Sounds to me that the cost basis of the paternal home is that originally paid, and the cost basis for the maternal home is its fair market value at your mom's date of death.

 

[JustMeUC]

The parental home was built by migrant workers to live in and seeing that we are talking about 90 or 100 years ago, probably cost a few hundred dollars I would guess? If this is the case, this one is definitely not worth depreciating!

 

[pb4uski]

Sounds to me that the cost basis of the paternal home is that originally paid, and the cost basis for the maternal home is its fair market value at your mom's date of death.

+1

 

[HawkeyeNFO]

I am thinking that I should depreciate them, but seems I have to determine a basis.

Yes you should depreciate them. When it comes time to sell, the IRS will assume that you have already done so, making your capital gains go up, even if you didn't take depreciation each year.

Good question on the basis. Not sure how you calculate it for this case. Generally depreciation is only on the structure, not the land.

 

[JustMeUC]

I was going to make an appointment with a CPA to discuss this issue but he wanted $300 just to meet with me and tell me the answer to this question so I think I will wait until tax time next year to figure it out...

 

[Nords]

The parental home was built by migrant workers to live in and seeing that we are talking about 90 or 100 years ago, probably cost a few hundred dollars I would guess? If this is the case, this one is definitely not worth depreciating!

Yes it is.

The IRS assumes you depreciate rental property (the structure, not the land). If you someday sell the property then you're obligated to pay depreciation recapture tax (at the rate of 25%) whether or not you've actually depreciated the property.

As you've pointed out, you don't know how much the property was worth when it was transferred from ancestor to elder. You need to determine how much the property was worth when the title was transferred to your name, and that's the basis which you start depreciating. If the value of the structure on the land was "zero", then you're definitely going to want to have an appraisal which can prove it to the IRS' satisfaction.

Since you seem to have been renting the property out for a few years, that means you might have to submit revised tax returns (and perhaps pay more taxes) for the years in which you should've depreciated (but did not).

You need to chat with a CPA and possibly even a tax lawyer.

 

[JustMeUC]

OK, it seems quite complicated and I think that I will indeed seek the advice of a CPA or Tax Attorney on the matter when doing taxes next year. Thanks!

 

[pb4uski]

....You need to determine how much the property was worth when the title was transferred to your name, and that's the basis which you start depreciating. ....

Wouldn't the basis be carryover basis if transferred (which the transferor is still alive) and fair value at date of death if transferred by a decedent?

 

[Nords]

Wouldn't the basis be carryover basis if transferred (which the transferor is still alive) and fair value at date of death if transferred by a decedent?

Probably, but I'm not sure about family limited partnerships or the process of transferring deeds over an extended period of time.

I'm sure about the CPA and the tax attorney parts.

OK, it seems quite complicated and I think that I will indeed seek the advice of a CPA or Tax Attorney on the matter when doing taxes next year. Thanks!

I think you're piling a new mistake on top of all the others.

If you wait until tax season, you'll make a huge enemy out of your CPA and your tax attorney and anyone else you talk to with the word "taxes" in their job description. You're essentially saying "I'm going to wait until they're in their busiest time of the year, and then I'm going to hand them this huge research project."

They've just finished doing tax returns for those of us who applied for a 15 Oct deadline. The only thing they have to worry about for the rest of the year is helping people with Roth IRA conversions and tax-deferred contribution limits. This is one of the quietest times of the year for tax professionals, so you should haul your records over there as soon as you find someone to work with.

You also face a slowly closing window on being able to correct old tax returns. I think it's three years but I'm not sure about this specific situation.

Finally, if you've screwed up by not paying enough taxes, then you're accruing penalties & interest. It also doesn't make your case look very good if it turns out that you've known about this for several months before acting on it.

You gain nothing by delaying.

 

[pb4uski]

Check out The Gift of Real Estate: Generosity Can Be Taxing

I would assume for now (subject to confirmation by your CPA/tax adviser) that the basis would be the transferor's tax basis (which would be what they paid + improvements - depreciation) for the transferred real estate and fair value at date of death for inherited real estate and begin researching/gathering data on that now rather than later.

You could even call your CPA and tell him/her that is your tentative conclusion but you wanted to do a quick check with them before you started gathering the background information.

YMMV

 

[JustMeUC]

Well, I walked into a CPA's office today beside my post office after mailing a package and spoke to the receptionist about making an appointment. The CPA happened to walk out of his office and said "I can see you now, I just had a cancellation, it will be $150 for a consult". I agreed as it was half the price of the other guy and we went back to his office.

We sat down and I started to explain. We were interrupted by his cell phone at least 3 times, and he took each call, including the one where he took an order from his mom for her dinner that night... I would guess I had a total of 2 minutes between his calls to explain and without ever really listening he told me that since they were both gifts he stated that the basis is zero on both houses. I continued to try to explain it to him and he kind of brushed me off by saying "well, I am not into estate planning so maybe you need to talk to a tax attorney" For sure, I did NOT get to explain nearly as much as I did in my original post here so I think the advice is pretty much worthless (though of course I paid the $150 for it)


He did make the time to tell me about his feelings about the Debate and his political views for at least 10 minutes however.

Thanks for the advice here on ER, I am pretty sure it is a lot more accurate than the CPA I paid for today!

 

[pb4uski]

I would ask for a refund - a gift does not have a zero basis. You won't get in trouble reporting a zero basis as all the proceeds would be gain and if you have no earthly idea what the carryover basis is then as a practical matter a zero basis would be a safe harbor. If the grantors ever rented the properties then if you can get their tax returns for the years just prior to receiving the gift you may gain some insight as to their basis.

See Tax Basis of Inherited and Gifted Property - FindLaw

 

[tryan]

Have your taxes done by a CPA and he'll deal with it ... mine charges $320 for a personal/joint return. Might find out NOT taking depreciation is an audit-flag ... never want to risk that.

 

[rothlev]

I would e mail him the IRS information on basis, and collect a refund. Both his answers are wrong. ( from pub551)
Property Received as a Gift


To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it.

Inherited Property

Special rules apply to property acquired from a decedent who died in 2010. See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details.

If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following.

1. The FMV of the property at the date of the individual's death.
2. The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.
3. The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.
4. The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

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.
For more information, see the Instructions for Form 706.