Depreciation recapture on sale of rental property after death of spouse

Forum|Forum|2 years ago
November 9, 2023
2 replies
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My spouse passed away 2 years ago. The basis of our rental was stepped up to market value when he passed away. I sold the property this year.

Question:

1. Do I have to recapture depreciation taken both before his death (based on the original cost) and depreciation taken after his death on the stepped up basis? Or,

2. Do I just have to recapture depreciation taken after his death on the stepped up basis?

Many Thanks,

LoLo

Best answer by Anonymous_

The following is a statement you made (circa April of 2023) in another one of your posts, @brookfield1:

Spouse died on 9/2/22. Rental property was owned by spouse and me as community property prior to spouse's death.

If the foregoing applies, you received a full step up in basis on the passing of your spouse.

Opus 17

Employee

Do you live in a community property state?

Anonymous_Answer

Employee

The following is a statement you made (circa April of 2023) in another one of your posts, @brookfield1:

Spouse died on 9/2/22. Rental property was owned by spouse and me as community property prior to spouse's death.

If the foregoing applies, you received a full step up in basis on the passing of your spouse.

brookfield1Author

Thank You CHAMP. I do live in a community state and the rental was almost fully depreciated prior to my spouse's death. It makes a huge difference if I do not have to recapture depreciation on our joint returns over 20 years prior to his death.

I raised the question because I consulted a tax professional. She showed me Form 4797 and that prior depreciation has to be added to Line 22. She added that Stepped Up Basis does not mean Stepped Up depreciation. I was suspicious because that was contrary to what I had read. It would also be unfair because prior depreciation was taken on MFJ tax rate before my spouse's death. If it had to be recaptured upon sale after his death, the recapture would be taxed on my current Single rate.

Many Thanks again.

Mike9241

depreciation pre-death disappears because you live in a community property state. depreciation post death including depreciation on the step-up would be subject to recapture upon sale.