In prior articles we have discussed the basis in property that is received through a survivorship right. The article below continues to discuss this issue, but brings an additional variable or issue into the discussion. This issue being: How does depreciation impact the basis of property that is received by a survivor, or in other words, if the asset received by the survivor was subject to depreciation, how does the depreciation impact the survivor’s basis in the asset? Please remember that the article below is for informational purposes and you should always consult with your tax attorney and/or estate planning attorney regarding your specific facts and circumstances.
When a survivor acquires property from a decedent prior to death, and the property is included within the decedent’s estate at fair market value when calculating estate tax, the survivor’s basis may be reduced by the amount of depreciation taken by the survivor when calculating taxable income. The code section to reference regarding this issue is Internal Revenue Code Section 1014(b)(9). Thus, when a co-owner of property has received benefits from depreciation on the property acquired and eventually obtains complete ownership, the properties basis in the hands of the survivor will be lessened by the depreciation benefit received before the co-owner’s death.
In most jurisdictions, two joint tenants are entitled to one-half of the income and charged with one-half of the expenses. Thus, upon the death of the first tenant the surviving tenant’s basis in the property would be reduced by one-half of the depreciation allowed during the time the property was owned in joint tenancy.
An example may help illustrate this matter. In 2010 X and Y purchase depreciable property for $100,000. Over four tax periods, from 2010 through 2013, depreciation of $10,000 is taken each year totaling $40,000, and Y passes away in 2013 when the property had appreciated to $120,000. X’s basis in the property would be $100,000. This is the full value of the property included in Y’s estate of $120,000, less $20,000, which is X’s share of the total depreciation taken during the time the applicable property was jointly owned.
Understanding and calculating basis can be complicated and require the maintenance of tax returns and other documents. But again, we care because you must be able to accurately calculate basis to accurately calculate the gain or loss upon the sale or disposition of an asset. If you have questions related to the basis of an asset, you can contact a Denver tax attorney at The McGuire Law Firm to discuss these matters. Further, The McGuire Law Firm assists clients with certain estate planning matters, and you can discuss the transfer of certain assets with an estate planning attorney if needed.