Tax Treatment of Personal/Business Property After Spouse Passes

[Damian S.]

My grandmother recently received my grandfather's half interest in a 4- flat as the surviving spouse. One of the apartments had been used as their principal residence and continues to be used by my grandmother. The remaining portion of the property or 75% had been depreciated for the past 16 years. Now my question is whether after my grandfather's passing half the interest in the property received a step-up in basis or just the half interest in the principal residence portion. The property is also not located in a community property state. Thank you in advance for input. 

[Lance Lvovsky]

As an answer to all tax related questions, the answer is "it depends" and I certainly would advise you to consult with a CPA as you do not want to miss out on potential tax savings.

With that being said, I assume your grandfather held title in his half interest in the 4-flat as "tenancy in common"? Under operation of law, your grandmother would receive step up in basis on your grandfather's interest in the 4-flat. In other words, 50% of the value of the property would be stepped up, and depreciation would "re-start" for your grandmother.

It is fine that your grandmother continues to live in 1 of the apartments. She would still receive step up in basis.

Let me know if you have any questions.