Part owner of residential rental

[LouD]

Client in previoius years had been a 1/3 owner in a residential rental property with Mom holding the other 2/3 interest. In Jan 2008, client buys Mom out of her 2/3 share so they now own 100% of the property for the entire year.

The original purchase price of the property was $417k back in 2005 so client's share of that was $139k based on his 1/3 share. Client pays Mom $175k to buy her out, so it's less than the original 2/3 share. My clients costs basis is now $314k, which is less than the original $417k.

What figures should I now be using for the depreciable basis of the rental property and the accumulated depreciation that should be entered on the books of my client? I'm thinking the cost basis will be the $314k, but should I add any accumulated depreciation for the Mom's time of ownership or just the accumulated depreciation that my client had for his 1/3 ownership before 2008?

Is there anything else that I'm missing for this year's return?

thanks in advance for the help!

[zeke]

LouD - I personally would leave the 1st 1/3 as one asset @ 139K, and add the other 2/3 as a new asset @ $175K. I don't see accumulated depr as having any effect upon acquisition. If better ideas exist, they will soon become apparent!

z

[OldJack]

You have to tell us how the real estate was being reported for tax purposes by your client. Was this reported on a form 1065 tax return or 1040 Sch-E tax return.

[LouD]

You have to tell us how the real estate was being reported for tax purposes by your client. Was this reported on a form 1065 tax return or 1040 Sch-E tax return.

sorry - it's being reported on a 1065 return

[OldJack]

This is a tricky case as real estate is not normally valued at less than the book value. I am not sure as I have not had this, but here is my take on the situation:

There was a partnership that owned the property and the client did not purchase the real estate as such from the partnership. Rather, he purchased an interest in the partnership (an outside tax basis $175k) which immediately caused administrative liquidation as he was the only owner left. The property was not "sold" to the client so there would be no gain or in this case a loss to recognize on liquidation. Therefore, the partnership distributed the real estate at its book value so that the liquidated value ($417k less depr) remains the tax basis for depreciation deduction until accumulation reaches his outside tax basis ($314k) at which time he could no longer deduct depreciation.