No. Do not adjust the original cost basis. If your parents were in a community property state, your mother can claim a new stepped-up basis on the home's entire market value. According to the IRS, the tax basis of inherited property is generally the fair market value on the date of death, or the alternate valuation date if that value was used on the decedent's estate tax return. Depreciation for the period after a decedent's death is computed using the fair market value as of the date of death or the fair market value on the alternate valuation date.
For the new basis, the accumulated depreciation on the rental property prior to the decedent's death is not considered. Once the property has been inherited, the depreciation schedule would begin based on the new fair market value. Depreciation expense in the year of inheritance, prior to date of death would be calculated using the old cost basis.
To accomplish this in TurboTax, you want to retire the assets (both house and land) as of the date of death. You can do this by indicating you converted the rental to personal use. This will stop the calculation of depreciation as of the date you 'convert". You will then start a new rental property placed in service as of the date of death using the value from your appraisal.
