Hello. I hope you are all enjoying this hot summer wherever you are! Thanks in advance for your help.

My clients: Young married couple. My question has to do with a rental property that the wife "inherited". (I don't have any written documentation regarding the home, only not so reliable details given to me by the wife.)

The story is that the wife (my client) and her brother were "given" their grandmother's house in 1997 when the grandmother went into a nursing home and signed the home over to them both. Evidently since 1997 they co-owned the home, however the grandson (my client's brother) was the one who lived in it until 2004 when he died! (I don't know if and when the grandmother passed away or if that is even relevant).

In case you are wondering, I have been doing the married couple's taxes since 2005 and no mention has ever been made about owning this home. It was brought up this year, as now since January 2008 she has renters living there and she wants to deduct all the expenses she has incurred for the improvements she has recently made. (Guess she has no rental income to report since 2004, hmmm?)

Here is the meat of the question: How is the basis of the home determined for depreciation purposes if she has no records of the value of the home in 1997 or 2004? And are those even the dates to go by?

Evidently, to figure the basis of the home I am suppose to find out what the grandmother originally paid for the home and any improvements she made, since it is considered a gift? (This is the info that my client absolutely doesn't have!) Also, since the brother died in 2004, I believe that 50% of the home then is supposed to have a stepped up basis determined on the FMV that the home had at THAT time. Another piece of info that the client doesn't have, although may be able to get from a real estate agent?

Thank you for input into this matter. I look forward to hearing from you soon.

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Obviously you've got a number of estate/gift tax issues to contend with.

You first need to determine the grandmother's cost.

I'm sure that there's a government record of the grandmother purchasing the house (maybe jointly with grandfather) - so you need to have the local assessor's office or government clerk's office provide you with that. There SHOULD BE (not necessarily WILL BE) a purchase price noted on the deed.

(Before I forget - I'm literally surprised that the real estate tax deduction was never mentioned in all the years before the brother died or even afterward).

Then - you need to determine who the brother's heir was to his assets after death - if not the sister. Assuming it was the sister - what was the FMV of the residence on his date of death (in order to give her the step-up on HIS half).

I have a feeling (if not located in the same geographic area) you're dealing with vacation home rules.

You really need to pin the wife down to reconstruct the facts even in absence of records before you can proceed - otherwise I'd refer this to an attorney.

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In thinking about this after my prior post -

I suggest you find out IF the grandmother ever filed a gift tax return for the transfer of title of the property, since it was transferred while she was still alive.

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From details in OP it appears grandma signed home over to client and brother without retaining life estate, since the time frame between the signing over and when she went into nursing home were simultaneous. If she gave total ownership (check the deed) to them at that time, then when grandma died is immaterial. Basis AT THAT TIME was what grandma originally paid for house + improvements, plus maybe 1/2 step-up when grandfather died (if applicable.) Brother and sister each owned 1/2 of that basis. When brother died, his half got stepped-up to FMV at that time. So who got his half? Did sister pay someone for it? Who owns now? Sister can add her improvements to her current basis for depreciation purposes.

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If Grandma and grandpa bought the house before a date in 1972 or 1973 and only grandpa's funds were used because grandma was a housewife then there is a 100% step up in basis on grandpa's death (I am pretty sure this little known fact is in QF). So that is the number you might need to start with. Then you add grandma's improvements till she gave it away. Then your basis is 50% of that plus 50% of the 2004 FMV.

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Good point. However, I believe the date that you use is anything prior to 1977. Could not find this info in QF.

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