dallas, TX · Member since 2012 · 2 posts · 0 votes
I am doing taxes for my parents. They have a home that they bought 30+ yrs ago. In Jun 2011, they moved in with my brother and rented out their home for income. Besides social security, that is the only source of income they have. As a result of very low income, they are going to be in a situation where they probably will never owe any taxes (they will get all of it back). I think they will probably rent out the house until they pass away. So, should I go through the trouble of depreciating their home? Will there be any benefits to it later when they pass it onto me after their deaths? Any thoughts would be appreciated. thanks.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
14y
N Wong,
You could depreciate it to be sure there is no income. Because their situation may change where the house needs to be sold, you will want to do it anyway. This will possibly generate a continuous Net operating loss that will carry over year after year until they either sell or pass. Any beneficiaries will inherit the home at fair market value. However, if their basis is much higher than FMV you may want to consider having them gift it to you in order to keep their same basis.
Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
14y
I am glad you are asking this question now. When you calculate the gain/loss on the sale of the home, the IRS requires that you calculate the gain/loss amount based on depreciation allowable not depreciation actually taken. I just went through an audit where the examiner refused to pick up the difference between the depreciation taken and the depreciation allowable. So it's best to take the depreciation.
You should also consider some form of entity structuring where you could take the benefit of the depreciation now since your parents will not need it.
dallas, TX · Member since 2012 · 2 posts · 0 votes
14y
Thank you for your responses. I will certainly depreciate the house.
However, I have yet another crinkle with respect to cost basis.
For some reason, my parents gifted the house to us (the 3 kids) about 5 yrs ago. Last year, we went ahead and regifted it back to them. So now, they are the owners again. My parents bought this house for $25k originally (crazy huh? =)). So my question is this... is their cost basis still $25k? (I will use 80/20 rule for structure/land value). My thoughts are that it should not really matter. Their income is so low that they will never fully take advantage of the depreciation. Also, they will probably rent this house out until they pass away and then leave it to us (in which case we will take it over at a cost basis of fair market value). Another question.. what are the tax implications if they do decide to sell soon? They will owe taxes on (FMV - cost basis of 25k) right? I hope the gifting and regifting does not cause too much trouble. thanks again for the insight!
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
14y
The best advice is to ask your Tax man AND your Estate Attorney. So many things can happen that will change the situation. I am fairly well versed in most Real Estate matters, but my father just passed away and I am learning new things now. In most cases, it never hurts to depreciate the rental, whoever inherits the house will have a new "basis." If your parents bought it 30 years ago, the depreciation can't be that much.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
14y
Originally posted by N Wong:
However, I have yet another crinkle with respect to cost basis.
For some reason, my parents gifted the house to us (the 3 kids) about 5 yrs ago. Last year, we went ahead and regifted it back to them. So now, they are the owners again. My parents bought this house for $25k originally (crazy huh? =)). So my question is this... is their cost basis still $25k? (I will use 80/20 rule for structure/land value).
When your parents gifted the house to you it was gifted with their basis, gifting it back it still maintains the same basis.
The 80/20 rule is only one way of allocating building and land. This may or may not be your best choice though.