Hi! I am new to the forum and have a question that maybe someone can answer. My father transferred the title to a four unit apartment building to me before he died that he was selling on a land contract. I was forced to foreclose on the buyers. I had assumed that i would be able to depreciate the property once i had title and was collecting rents, but my tax preparer told me that, because the property had already been depreciated by the previous owners, i could not claim depreciation. Is she correct? Thanks.
-Sonriente
that would be correct. basis of gifted property transfers to the recipient. so if the property was already fully depreciated, there is no more depreciation to be taken.
HOWEVER, you also need to know the value of the property at the time of the gift. If it exceeds the annual exclusion (probably) you may need to file a gift tax return.
and keep good records. when you sell the property you will need to be able to substantiate all this to figure your gain.
Thanks for your response.
Suggest you consult a real estate tax professional, someone other than your tax preparer.
The real issue is whether you had a taxable gain when you reacquired the property. §1038 of the tax code has some complicated rules that apply when a seller forecloses on a property sold to another on the installment plan. Even though the foreclosure has the seller reacquiring property he or she previously owned, the seller now has all the payments previously made by the former buyer AND has the entire property back. Basically, the tax code converts all the previous payments into taxable gain, limited only by the original gain itself. The troublesome outcome here is that there is usually no cash to pay the taxes on this “phantom” gain, and, the repossessor normally has to pay attorney fees in addition to the taxes owed to the IRS.
The silver lining here is that any taxable gain you realize on the repossession plus any gain that has already been recognized is added to your tax basis and the portion of that new basis attributed to the dwelling structure can be depreciated.