Rental Property in Estate - No Depreciation

[Yardley CPA]

1041 return.  Small Rental property included in the Estate which started in 2017.  The previous preparer did not take depreciation on the rental.     Home value is $240,000 with approximately $40,000 of that amount being land.  Even without the depreciation expense, the rental had a small loss in 2017.  The only activity in the estate is the rental.  What's the best way to rectify this?  Amend 2017? 

[Yardley CPA]

An update to my previous post.  The rental has been in existence since 2014.  Has not been depreciated since it's inception.  

[Gail in Virginia]

Isn't this a common time to use Form 3115? 

[Yardley CPA]

Can Form 3115 be used on a 1041 return?

[DANRVAN]

5 minutes ago, Yardley CPA said:

Can Form 3115 be used on a 1041 return?

Yep, recently did one from HR Block screw up.  They also overlooked to file an initial short year and accrual accounting  which would have offset income with legal expenses.

[SaraEA]

If the estate started in 2017, it got stepped up basis and would start depreciation from that amount.  Since it only filed one return you can amend 2017.

[michaelmars]

why would the past matter? once it goes into the estate it gets a new basis based on market value and depreciation starts over.  i would not do a 3115

[DANRVAN]

In the situation I referred to above the estate had more income to off set in the current tax year so 3115 worked better than an amended return.

[Bart]

There is no 3115.  There is no missed depreciation for the estate.  DOD step up basis starts everything from new.

[DANRVAN]

13 hours ago, Bart said:

There is no 3115.  There is no missed depreciation for the estate.  DOD step up basis starts everything from new.

After assets pass from estate, heirs get stepped up basis less depreciation allowable by estate.  Look up  Uniform of Basis Rules per reg 1.1014-4.

That can be significant if estate has a long drawn out duration.

[Bart]

7 hours ago, DANRVAN said:

After assets pass from estate, heirs get stepped up basis less depreciation allowable by estate.  Look up  Uniform of Basis Rules per reg 1.1014-4.

That can be significant if estate has a long drawn out duration.

In reg 1.1014-4

 

If the bequest is of the residue to trustees intrust, and the executors do not distribute the residue to such trustees until five years after the death of the decedent, the basis of each piece of property left by the decedent and thus received, in the hands of the trustees, is its fair market value at the time when the decedent dies. If the bequest is to trustees in trust to pay to A during his lifetime the income of the property bequeathed, and after his death to distribute such property to the survivors of a class, and upon A's death the property is distributed to the taxpayer as the sole survivor, the basis of such property, in the hands of the taxpayer, is its fair market value at the time when the decedent died.

 

I read that to mean the estate/trust does get a stepped up/down basis to FMV at date of death.

[Gail in Virginia]

I think you are both saying the same thing - just looking at it differently.  if i understand Danrvan, the owner died in a year prior to 2017.  Estate inherited rental property, with a stepped up basis.  While in the hands of the estate, income was received and reported on a 1041 but no depreciation was taken.  Now it is 2018, and the return (i think another 1041?) is being prepared by Danrvan and he notices that depreciation has not been taken and is going to take in, and file a 3115 to catch up the years that were missed while the property was in the estate.  There is no second step up in basis when the property is transferred from the estate to the final beneficiaries. 

I don't know if that is any clearer, or if I misunderstood Danrvan's posts. 

[Bart]

I missed that the estate started in 2017.  I think you are correct Gail.  I thought Danrvan was saying the estate did not get a step up in basis.  Jeez April 10 and I am easily confused.  Imagine that.

[DANRVAN]

6 hours ago, Bart said:

I missed that the estate started in 2017.  I think you are correct Gail.  I thought Danrvan was saying the estate did not get a step up in basis.  Jeez April 10 and I am easily confused.  Imagine that.

That quote from 1.1014.4 (a)(2) is also confusing.  It is an illustrative statement of the general rule of that paragraph which basically means there is not a 2nd step up when the asset passes from the estate to the heir.

The preceding paragraph 1.1014.4 (a)(1) tells us the adjusted basis of depreciable of property passes from the estate to the heirs.

An estate is allowed depreciation per section 167(d), therefore adjusted basis includes deprecation allowed or allowable as with any other entity.