My wife died in 2022. In Turbotax, how can I Step Up the cost base of our rental property to get more depreciation? Can I update the original Cost to reflect the Step Up?

Forum|Forum|3 years ago
February 5, 2023
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For example, if the original cost is $200,000. It has been depreciated for a few years (say, depreciated $20,000 already). Now the Fair Market Value on the day of her death is $400,000. What should I do in Turbotax to step up the cost basis to get more depreciation? Should I simply change the original Cost Basis (i.e. $200 k) to the new step up'd cost basis of $300 k (i.e. 50% step up)? How about the amount that has already been depreciated in prior years (i.e. the $20,000)? Should I cut it in half (So the new depreciated amount will be $10,000) since my wife's part should be wiped off?

TurboTax Premier Online

Best answer by AmeliesUncle

Hi Carl,

I am more confused.

Actually, I have two rental properties (Say A and B). Now as you said, I need to add the step up portion as a separated asset for both of them.

Say for property A, how can I add the Step Up asset and let Turbotax know this asset will go with the original asset for property A, but not go under property B? Which page in Turbotax online will allow me to add an additional asset to an existing property (So the newly added asset will go with the existing asset into the same column in Schedule E)?

Thanks!

For this year, each existing "asset" (for both properties) should actually be turned into THREE assets.

A new one with 50% of the original Basis, 50% of the "prior depreciation" and the original placed in service date. This is 'your' portion that you have previously owned and will continue to depreciate.
A new one with 50% of the original Basis, 50% of the "prior depreciation" and the original placed in service date. Mark that "asset" as "disposed" and say you converted it to personal use on the date of your wife's death. That is your wife's portion before she died. This one will not carry forward to future years.
A new one with 50% of the Fair Market Value on the date of your wife's death. The "placed in service" date would be the date of your wife's death. This is the stepped-up 50% that belonged to your wife.

After you are sure you have all of the new information, delete the old asset.

Carl11_2

Employee

I'm sorry for your loss.

Should I simply change the original Cost Basis (i.e. $200 k) to the new step up'd cost basis of $300 k (i.e. 50% step up)?

No. Absolutely not. If you change the cost of "ANYTHING" in the existing asset, you will completely mess up the depreciation history, as well as the current year depreciation. Under no circumstances and with no exceptions do you every change the original cost basis entry of any asset. No exceptions.

What should I do in Turbotax to step up the cost basis to get more depreciation?

You simply enter a 2nd asset with a cost basis that is the amount of the step-up. Remember, the cost basis of the land steps up too. So if the original cost basis on the property was $200K with 50K allocated to the land, lets say the new cost basis is $300K.

Since the original cost basis allocated 1/4 of the total to the land, you must do the same with the step-up. You'll enter a new asset with a cost of $100K in the COST box, and $25K in the COST OF LAND box. The program (not you) will do the math and allocated 3/4 ($75K) to the structure. You can call the new entry whatever you want, so you know what it is. But it's classified as Residential Rental Real Estate in MACRS with an in service date equal to the date of passing, and depreciation on that stepepd up basis will be over the next 27.5 years starting on the date of her passing. So the first year depreciation on that will be pro-rated based on the date of passive/in service date.

ming3Author

Hi Carl,

Thank you for your detailed reply!

I just want to confirm my understanding is correct:

1. From now on, a single property will become 2 assets in Turbotax for all coming years until the property is sold. The 1st one is the original which will not be changed at all, the 2nd one is just the step up portion of the same real property. These two will always be kept separately in Turbotax. Is that right?

2. Do I need to prorate all my expenses, one by one, between these two assets every year? Can I leave everything to the original asset as before, and put nothing (No income, no expense) in the newly created "step up" asset? This way, the "step up" asset will only have depreciation but nothing else. Turbotax will automatically combine all rental assets when calculating total rental income and tax, so to me, the end result will be the same and it will save me a lot of time to prorate and divide all expenses between these two assets every year. Is this allowed?

Thank you for your help!