Step Up Basis Adjustment

Today TaxMama hears from Rob in the TaxQuips Forum, who couldn’t get IRS to answer him.  “I am adjusting a 2006 return using the 3115 Form per your guidance.  The Real estate is 1974 property where we used ACRS, 125% and 20 years.   For the step-up do I have to use MACRS lives and methods?”

Dear Rob,

 IRS couldn’t answer without more information.  They should have asked you some questions, or turned you over to a subject matter expert. Here are some of the issues.

 Why is there a step-up?  Did the owner die? Was there a single owner on title – or a husband and wife?  What kind of real estate?  Residential or Commercial.

Let me try to answer you by making some assumptions:

Assuming this is some sort of rental property. 

Assuming someone inherited the property.

Assuming you are wanting to report depreciation on the first tax return after the death.

Use the appraised value of the building only (not the land) at date of death.

The heir’s holding period will still be that of the person from whom s/he inherited the property.

But start depreciation all over again as if it were new, from date of death.

Use the MACRS tables for either residential or commercial depending on which type of real estate this is. (They are essentially SL tables, over either 27.5 years or 39 years.)

 Forget about all the old depreciation, the method et al are irrelevant.  Pretty simple. Eh?

 And remember, you can find answers to all kinds of questions about depreciation adjustments, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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