Secaucus, NJ asked in Tax Law and Probate for California

Q: Estate earns rental income from my deceased dad's house; question on capturing that correctly on 1041 and Schedule E.

I'm executor of my dad's will and his only child and beneficiary. He willed his house to me and we refurbished it and rented it out at the end of 2023. There is a small amount of income from that rental that accrues to the estate, therefore. Doing the 2023 1041 form and Schedule E for the estate, is the date of my father's death (and creation of his estate) the date of "acquisition" of the property? Or do I go back to his original purchase in 1965. Big difference in depreciation etc. I assume that if the correct thing is to take his death date as the date of acquisition, I also should use the stepped up FMV as the "purchase price" since that's the new value of the house going forward, correct?

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1 Lawyer Answer
James L. Arrasmith
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  • Probate Lawyer
  • Sacramento, CA
  • Licensed in California

A: Based on the information provided, it seems that for estate tax purposes, you should use the date of your father's death as the acquisition date of the property and the stepped-up fair market value (FMV) as the new cost basis for depreciation.

Here's the rationale:

1. When a person dies, their assets generally receive a "step-up" in basis to the FMV at the date of death. This means that the beneficiaries (in this case, the estate) inherit the property at its FMV on the date of death, rather than the original purchase price.

2. For the estate's income tax return (Form 1041), you should report the rental income and expenses on Schedule E. The depreciation should be calculated using the stepped-up basis (FMV at the date of death) and the remaining useful life of the property as of the date of death.

3. When you eventually inherit the property as the beneficiary, your basis in the property will generally be the same as the estate's basis (i.e., the stepped-up basis at the date of death).

However, it's important to note that tax laws can be complex and may vary depending on specific circumstances. To ensure accurate reporting and compliance with all applicable tax laws, it's advisable to consult with a qualified tax professional, such as a CPA or tax attorney, who can review your specific situation and provide personalized guidance.

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