Author Topic: Depreciation on rental property with zero cost basis?  (Read 3240 times)

Rylito

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Depreciation on rental property with zero cost basis?
« on: April 11, 2015, 02:38:56 PM »
Hi everyone,

My mother in-law is considering giving her house to my husband (he would re-fi in his name only and remove her name from the title) for him to use as a rental property.

We're trying to figure out all the tax implications and I was wondering how he would claim depreciation on this house if he didn't pay anything for it.  Would he still be subject to a recapture tax upon selling if he never claimed depreciation? 

Thanks for any light you can shed!

SaintM

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Re: Depreciation on rental property with zero cost basis?
« Reply #1 on: April 11, 2015, 03:19:27 PM »
The lower of your mother-in-laws tax basis (and therefore gain) or the value of the house will become  your husband's basis. He can claim depreciation and would be subject to the recapture tax.

Rylito

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Re: Depreciation on rental property with zero cost basis?
« Reply #2 on: April 11, 2015, 04:17:23 PM »
Thank you for clearing this up :)

Drifterrider

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Re: Depreciation on rental property with zero cost basis?
« Reply #3 on: April 13, 2015, 11:05:02 AM »
My mother in-law is considering giving her house to my husband

Keep in mind that depending on the value of the house, the transfer could be considered a taxable event (in the US, federal gift taxes). 

johnhenry

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Re: Depreciation on rental property with zero cost basis?
« Reply #4 on: April 14, 2015, 08:44:53 AM »
Hi everyone,

My mother in-law is considering giving her house to my husband (he would re-fi in his name only and remove her name from the title) for him to use as a rental property.

We're trying to figure out all the tax implications and I was wondering how he would claim depreciation on this house if he didn't pay anything for it.  Would he still be subject to a recapture tax upon selling if he never claimed depreciation? 

Thanks for any light you can shed!

Not to pry.... but is there a significant reason for her to gift now as opposed to allowing him to inherit later?  Since the basis for inherited property is "stepped up" (or "stepped down") it will almost certainly benefit him to inherit.  To avoid capital gains at selling and/or to be able to defer more income due to calculating depreciation using the stepped up basis.  I'm assuming the FMV of the property is higher than her current basis.  The bigger the difference the greater the benefit of inheriting (for him/the estate).  If she hasn't owned the property long and the property hasn't appreciated significantly it may not matter much.

There may be a valid reason to transfer as a gift.  But strictly from an estate planning point of view it probably makes sense to inherit later. 

Drifterrider

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Re: Depreciation on rental property with zero cost basis?
« Reply #5 on: April 14, 2015, 12:40:44 PM »
My mother in-law is considering giving her house to my husband (he would re-fi in his name only and remove her name from the title) for him to use as a rental property.
He is paying for it. Depending on how much the mortgage is compared to the value of the home this may be considered a straight purchase where the mortgage amount is your basis or it may be considered a gift where StMichael's answer is correct

Then the basic premise is false.  One can't "give" what one doesn't own.  If the house has no mortgage then the MIL may "give" the house.  Depending on the value of the house, gift taxes might be due.  Thereafter the son may take a home equity loan (it wouldn't be a re-fi as there is no "fi").

The MIL may "sell" the house to the son and then it is his (no gift involved) and the existing mortgage is paid out of proceeds at closing.  The MIL may be subject to capital gains taxes but probably not (2 of 5 years rule).

There is never a zero cost basis (otherwise you can never take depreciation).



jmusic

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Re: Depreciation on rental property with zero cost basis?
« Reply #6 on: April 14, 2015, 08:54:45 PM »
Hi everyone,

My mother in-law is considering giving her house to my husband (he would re-fi in his name only and remove her name from the title) for him to use as a rental property.

We're trying to figure out all the tax implications and I was wondering how he would claim depreciation on this house if he didn't pay anything for it.  Would he still be subject to a recapture tax upon selling if he never claimed depreciation? 

Thanks for any light you can shed!

Not to pry.... but is there a significant reason for her to gift now as opposed to allowing him to inherit later?  Since the basis for inherited property is "stepped up" (or "stepped down") it will almost certainly benefit him to inherit.  To avoid capital gains at selling and/or to be able to defer more income due to calculating depreciation using the stepped up basis.  I'm assuming the FMV of the property is higher than her current basis.  The bigger the difference the greater the benefit of inheriting (for him/the estate).  If she hasn't owned the property long and the property hasn't appreciated significantly it may not matter much.

There may be a valid reason to transfer as a gift.  But strictly from an estate planning point of view it probably makes sense to inherit later.

This!  Not only does inheriting avoid a potential 5 figure tax bill, he also gets to start the depreciation all over again!