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Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I own a condo for 25 years with my wife and sister. They recently

Resolved Question:

I own a condo for 25 years with my wife and sister. They recently both passed away. We have always rented the condo and written off the depreciation. I look into selling it before the passed and would have had to pay substancial capital gains tax. What about now that they have both passed. It is worth about 300k, we paid about 170k for it.
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.
HelloCustomer

Were you all on the deed to this condo as tenants in common or just what were the ownership arrangements?

Did everyone contribute equal amounts to this investment?

Customer: replied 5 years ago.

My wife and I were on deed as Robert Cloo and Diane Cloos and sister was on deed as Joint Tenants.

Everyone contributed to initial investment but I ran it and my wife and I took the depreciation deductions over the years off my taxes.

Expert:  Merlo replied 5 years ago.
HelloCustomer

Thank you for the additional informtaion.

Since your wife and sister have now both passed away, you will need to figure your new basis in the property. It gets a little more complicated than normal since there were 3 owners involved, but I will try to give you some examples to explain how this works. Also, you did not indicate if it was your wife or your sister that was first deceased, so you may have to adjust my examples accordingly.

Basically when property is held by joint tenants, and assuming everyone initially contributed equal amounts, then when one of the tenants passes away, the remaining tenants then receive a "stepped up" basis, but only on the percentage which that tenant owned. Your new basis then needs to be reduced by any depreciation which was previously allowed to the deceased tenant. Following is an example of how this works.

Let's say that you and your wife and your sister each contributed $50,000 (total of $150,000) to purchase this property, so you each equally owned 1/3 of this investment. A few years later your sister passes away, and the property at that time is worth $225,000. You and your wife each inherit half of the sister's portion (or 1/6 each). If the value at the time of your sister's death is $225,000, then her portion (1/3) was worth $75,000. You originally contributed $50,000 and you now receive the stepped up basis on the portion inherited from your sister, which is half of the $75,000, or a total of $37,500. Your new basis is now $87,500. You do not reduce this by any depreciation, because none of the depreciation was claimed by your sister over the years. Your wife's new basis is figured exactly the same, so that now you and your wife each have a new basis of $87,500 each in the property. The new total basis between you and your wife is $175,000 and you each have a 50% share in the property.

If a few years after that your wife passes away and the property is now worth $260,000, then you would again need to figure your new basis in the property. You would now start with your adjusted basis of $87,500 and add to that the stepped up basis on your wife's share. Since the property is now worth $260,000, your wife's share of that (50%) is $130,000. Your new adjusted basis, before deducting depreciation, now becomes $87,500 plus $130,000, or a total of $217,500. Since you and your wife claimed the depreciation on this property, you now have to reduce your new adjusted basis by the depreciation claimed. Let's assume the depreciation you claimed over the years you owned this property came to $27,500. You would deduct the $27,500 from your new adjusted basis of $217,500, and your new basis would now be $190,000.

If at that point you were to immediately sell the property for its market value of $260,000, you would have a reportable gain of $70,000, and you would owe long term capital gains tax on that amount. If you continued to hold the property and it increased in value, then once you sell it, your gain will be calculated by taking the selling price, less your basis of $190,000, and then adding back any additional depreciation claimed since the death of your spouse.

Please note that the rules for determining your new basis on property inherited from a spouse in a community property state are different. I assume from your post that you are from New Jersey which is not a community property state.

I am giving you a link below to Publication 551 which explains how to figure the Basis of Assets. You should refer in particular to the sections which cover basis on inherited property.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.

http://www.irs.gov/pub/irs-pdf/p551.pdf
Customer: replied 5 years ago.

So none of the accummulated depreciation is lowered by the passing of my wife?

Is that correct?

Expert:  Merlo replied 5 years ago.
HelloCustomer

I assume that when your wife was still alive that you and she were filing as married joint return. If that is the case, you will not lower your basis for any depreciation at this point that was attributable to your wife's share. If you and your wife were filing separate returns, then yes, you would lower your basis by the amount of depreciation that she had taken on her returns over the years.

If you were filing joint returns, then when the condo is eventually sold, at that time you will account for any depreciation taken by you and your wife combined when figuring your gain on the sale. So your basis will eventually be reduced at some point by the depreciation claimed.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you.

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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