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.

Contact The McGuire Law Firm to schedule your free consultation with a tax attorney in Denver, Colorado.

If the transfer is made between spouses, or is a transfer incident to a divorce, basis would be determined under Internal Revenue Code Section 1041 as opposed to Section 1015.  Under IRC Section 1041, the transfer would be treated as a gift whereby no gain or loss is recognized and the transferee or recipient of the gift would take the transferor’s adjusted basis, or a carryover basis.

An example may help illustrate the above issues.  For this example, assume that Mr. Husband purchased real estate with a value of $700,000 of his own funds, and the property is held jointly with his wife as joint tenants.  Further, we will assume wife is a US Citizen and that the interests of the spouses would be severable under state law.  Thus, both husband and wife would be considered to own 50% (fifty percent) or half of the interest real property.  The gift to wife of $250,000 would not be taxable because of the marital deduction under Internal Revenue Code Section 2523.  Because husband’s adjusted cost basis would determine wife’s adjusted basis in the property received via the gift, wife’s adjusted basis in the real property should be $250,000.

It is important to note Regs 1.1041 because the carryover basis under IRC Section 1041 would apply even if the adjusted basis in the property that has been transferred exceeded the fair market value of property that the time of transfer.  Therefore, transfers of property subject to IRC Section 1041 can produce a different result than when applying the tax law under IRC Section 1015.

If you have questions relating to gifts or your estate plan, please contact a Denver estate planning attorney at The McGuire Law Firm.  An estate planning attorney can assist you with gifting issues and the drafting of estate planning documents such as a will or trust.