Rental with no depreciation and gifting property

[ILLMAS]

TP has been reporting a rental property since 2013 with no depreciation deduction from 2013 to 2018, starting in 2019 depreciation was reported.  Fast forward to today, TP paid $50K for the rental back in 2013, total depreciation so far has been $3,636 (2019 and 2020) and $9,090 was never deducted, TP wants to gift the property to their son and is worth $100K, and I wanted to see if the depreciation recapture has to be reported for $3,636+$9,090= $12,726 and the TP has to pay capital gains on it or the $100K gift is reduced by depreciation recapture?

Thanks

[DANRVAN]

TP does not recognize any taxable income on transfer unless son assumes liabilities.  In that case you have a partial sale / gift.

Also no depreciation recapture, son assumes the basis and tax attributes of parents.

But you need to file form 3115 on parents return to pickup the omitted depreciation as a 481a adjustment.

[Terry D EA]

Wouldn’t the donor’s basis be reduced by the depreciation that was taken and should have been taken? Adjusted basis is the Donor’s  basis correct? Son gets adjusted basis.

 

[DANRVAN]

35 minutes ago, Terry D said:

Son gets adjusted basis.

correct

 

1 hour ago, DANRVAN said:

son assumes the basis and tax attributes of parents.

 

[Sara EA]

If basis follows the same rules as everything else, it is cost minus depreciation allowed or allowable.  Donee will have a lower basis to begin depreciation anew.  As for filing the 3115, it depends.  Was the property profitable or showing losses?  Were the losses even useful or disallowed because of AGI?  If the donors' tax bracket is low, how much will the additional $9k depreciation net them, if anything?  You can let them decide if it will be worth your fee.  (To those who like to do everything "by the books," the IRS isn't going to complain if landlords didn't take a deduction to which they were entitled.)

[jklcpa]

As Danrvan said, the son assumes adjusted basis and tax attributes from the parents. I would add to that to note that if there are unused PALs, those unused PALs will increase the son's basis.  Ref is Per Section 469(j)(6)(A).

Son really needs the details of the depreciation allowed or allowable on parents return and how parent's adjusted basis was determined at the time of the gift so that if he sells the property, he can properly calculate the depreciation recapture.

[DANRVAN]

3 hours ago, Sara EA said:

how much will the additional $9k depreciation net them, if anything?  You can let them decide if it will be worth your fee. 

That is a good point Sara, but I have yet to run across a situation where 481a depreciation adjustment did not net a tax benefit.

If the adjustment increases a PAL, which passes through to to the son, his basis would be increased by $9,090.

[Sara EA]

Good thoughts, Dan.  I hadn't considered the benefits to the son if the parents couldn't benefit.  Why we encounter so many rentals with no depreciation is a mystery to me.  Or so many rentals being depreciated without land value broken out.  These common errors prove that there is no substitute for tax knowledge instead of letting the computer do it.  I give Illmas credit because that missing depreciation had to be calculated by hand, knowing which table to use.  Tell that to TurboTax!

[Lee B]

Even if land and residence are broken out, nothing for appliances.