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capital gain tax on sale of inherited rental property

My parents purchased a condo in 2003 for $30,000

I inherited the property in 2014 and it has been used as rental property the entire time.

My attorney placed a county assessed value of $40,000 when he recorded the deed.

When I did my taxes in 2004 I used this value when asked What was the total cost of the property.

In reviewing IRS.GOV it stated the "step up value" at the time of inheritance should be the fair market value of the property to sell and not the county assessed Value.

The FMV of this property should have been $60,000 at time of inheritance based on my review of sales of units from this condo complex. I plan to sell the condo at $70,000

I did a mock up tax return from my 2017 return to determine what the capital gains tax will be as an estimate. It appears that turbo tax is using the $40,000 assessed value as the basis for the calculating the capital gains tax. 

Q1: Is the capital gain tax the difference of the FMV selling price at time of inheritance and compared to present FMV sale price? And will Turbo Tax ask me to complete a form to reflect this or will it use the $40,000 county assessed value that is plugged into turbo tax since 2004 that is used for depreciation and income and deductions?

Q2: If the county assessed value is used by turbo tax (since i have filed my taxes for all years with turbo tax) Can this value be updated to reflect the $60,000 step up FMV sale price

I'm trying to be prepared for 2018 income taxes Smiley Happy

Thanks in advance for your responses !!!

 

 

 

2 Comments
Catalyst V

capital gain tax on sale of inherited rental property

Actually, your attorney may have informed you incorrectly on what value to use for depreciation. (Or he may not have, as I'm not clear on that. But it's a moot point at this time anyway).

But for future reference, you depreciate property on the *lesser* of what you paid for it, or it's FMV at the time the property was placed in service. Now in your case since the property was inherited, your "lesser" value (if you want to call it that) is the FMV of the property at the time the person you inherited it from passed. (not the date your name was put on the deed).

As it stands now, leave well enough alone on that FMV/depreciation front and just work with what you have. But in your case, you can't do this the easy way and report the sale in the Rental & Royalty Income (SCH E) section of the program, since the deprecation value is significantly less than the FMV at the time your parent(s) passed. So here's the basics of the procedure. Give it a shot, and if you need the fine details, I have those.

 

First, work through the rental "as if" you never sold it, reporting all rental income and expenses. Start with the "Property Profile" section. I think it's the third screen in you'll select the option for "I sold or disposed of this property in 2017". Select that option and then you *must* finish working through that section.

Next is the rental income section. Work that through. Now even if you have no rental income in 2017, you *must* enter a digit, even if it's a zero. (program quirk, so just do it and let's get on with this.)

Next work through the expenses section. But if you don't have any rental expenses, then you can if you want, skip that section altogether. (I recommend you work it through anyway, as it will probably jog your memory on an expense you forgot about, such as insurance, property taxes, or mortgage interest.) If asked if you rented the property all year, select YES if it was classified as a rental up to the closing date of the sale. (It was, so select yes and press on.)

THe next section is no longer titled Assets/Depreciation. It's now called Sale of Property/Deprecation. Enter that section.

You *must* work through each asset listed there one at a time and perform the following:

 - Write down on a piece of paper, all the information presented on the "Review Information" Screen, you will need those figures later. Make sure you label what you write down also. Click YES.

 - Did you stop using this asset? Click the YES button.
 - leave date acquired alone, and enter the closing date for the date sold, then continue.

On the "Special Handling Required?" screen, click YES.

 - Now write down the amount of deprecation for 2017 on this asset. Add together the deprecation already taken in prior years on this asset (which you already wrote down) to this figure to get the total depreciation you have taken on this asset since you owned/acquired it. Then click Continue.

 

This puts you back to the "Your Property Assets" screen. If additional assets are listed, work them through exactly the same as above, ensuring your "sale or disposition date" is the same for all assets.

Once this is done for all assets, you need to add up the total of the depreciation taken on each asset, to get the total depreciation taken on all assets. You will need that figure later.

Click the Done button to return to the Rental Summary Screen.

If at any time while you owned this property you claimed any vehicle expenses (even in a previous year) then you must show the disposition of that vehicle. Just work through the vehicle expenses section. Now I seriously doubt that you sold this vehicle as a part of the rental sale. So just indicate that it was removed for personal use, and don't concern youself with any cost or depreciation numbers if presented. You will NOT need any vehicle information at all, for reporting the sale of this rental property. ALl you're doing is "closing out" this SCH E with the IRS, by showing the disposition of *every* *single* *asset* associated with the rental.

Once done, click the "Done With Rentals" button to completely exit the rental income/expense (SCH E) section of the program, thus saving all your work. You have no need to enter this section again. (hopefully, provided you did things right the first time, or course!)

 

Now with all the data you have written down, you should have all that you need to report the sale of this rental (with the correct cost basis now) in the "Sale of Business Property" section. Any questions while doing that, please feel free to post back and ask.

 

 

Member

capital gain tax on sale of inherited rental property

Carl

Thank you providing an in-depth response to this tax scenario.

I appreciate your time spent and your guidance.

I have reviewed the process and it makes sense and will proceed accordingly.