Sale of Rental House

[Christian]

A client inherited an undivided 50% interest in his father's farmland and a house on the farm along with his brother. Later on his brother died and the widow sold her half interest to the client and his wife. Since he was unmarried when he inherited his 50% interest he owned this himself. After marriage he and his wife bought as noted the other half of the farm. This gives him a 3/4 interest in the farm land and house and his wife a 1/4 interest. He has now died and his wife has inherited the property. Her son having power of attorney is selling the farm and house. Since the father owned 3/4 of the farm this passes at the stepped up inherited value to his wife leaving her 1/4 interest valued at the price paid years back. The house was converted to a rental years ago and is now mostly fully depreciated . And therein lies my problem. How do I apportion interest in this mostly depreciated out property?

[Max W]

Before doing any math, I would want to know for certainty that the widow actually owned 1/4 share.    How was the sales contract made out?  Were any of the wife/widow's funds used?  How is the property titled?  Was the property retitled into both names when they got married, (showing intent to share ownership)?

 

 

[Christian]

I reviewed with the client's attorney the record on the land transfers and it was his judgement that the husband owned some 3/4 of the property. The half interest purchased by he and his wife later was placed into joint ownership when bought from the brother's widow. The attorney concluded that the client owned 3/4 of the property and that his wife owned 1/4. Both husband and wife were employed at the time and I have no clue whose funds bought what but am comfortable with their attorney's decision as to who owned what. She has inherited 3/4 of the farm at the stepped up value with her 1/4 interest being valued at it's value at time of purchase. The fact that they converted the house on the farm to rental is my only sticking point. 

[Christian]

I am simply wondering if  since the husband owned 3/4 of the house if the house is inherited 3/4 of the depreciated value or does the widow inherit it at the stepped up market value which is of course much higher? This is a reminder of why I am considering folding the tent. 

[Gail in Virginia]

Or since a rental was involved, do they have a partnership and would a 754 election be required?

[Max W]

2 hours ago, Christian said:

I am simply wondering if  since the husband owned 3/4 of the house if the house is inherited 3/4 of the depreciated value or does the widow inherit it at the stepped up market value which is of course much higher? This is a reminder of why I am considering folding the tent. 

It is the FMV at the time of death.  There executor should have had gotten an appraisal shortly thereafter.

[Max W]

2 hours ago, Gail in Virginia said:

Or since a rental was involved, do they have a partnership and would a 754 election be required?

754  comes into play only if they file as a partnership.  Two or more persons can have different shares in a rental property and each would file a Sche E with their %age of income and expenses.    

[SaraEA]

The widow gets 3/4 of the property at stepped-up basis.  Forget depreciation, basis of the inherited portion is FMV on date of death.  For her 1/4, basis is her original share of purchase price less 1/4 of the depreciation taken over the years.  Hey, you're in this business because you love math, right?

[Christian]

Well y'all have once again relieved me of another problem. I was unaware I had to love math to prepare taxes. An  appraisal of the property by the executor ? The sucker was unaware he was an executor ! This is one of those little details he will now have to become familiar with.

[SaraEA]

Some clients would watch my employer, who was a CPA, rapidly punch in data and remark "you sure are good at math."  He would say, "No, I'm terrible at math" and watch their faces.