How to determine cost basis for a gifted rental property I inherited?

What you're dealing with is a common situation with gifted properties. When you receive a property as a gift, you typically take on the donor's basis (called a "carryover basis"), but there are some exceptions. Since your dad added you to the deed in 2016 and passed away shortly after, the property wasn't fully inherited (which would give you a stepped-up basis to fair market value), but was partially gifted during his lifetime. This creates what's called a "part-gift, part-inheritance" situation which can be tricky. In your case, using the tax assessor's value from 2016 is a reasonable approach given your limited information. However, tax assessments are often lower than actual market value. If possible, I'd recommend looking at comparable sales in the neighborhood from 2016 or getting a retrospective appraisal. Some appraisers can determine what a property was worth at a previous date. Also, check if your parent filed a gift tax return (Form 709) for 2016, as this might have documentation of the property's value at that time.

After struggling with a similar situation last year, I found an amazing tool that saved me tons of time and stress. Check out https://taxr.ai - they have a specific feature for analyzing property basis situations. I uploaded my property documents and answered a few questions about when I received the property, and they provided a detailed analysis showing exactly how to calculate my basis and depreciation. They even explained which tax forms I needed and how to document everything properly in case of an audit. The best part was they found a way to establish a higher basis than what I initially calculated, which saved me a significant amount on taxes. For your situation, they could help determine if you have a partial step-up in basis or if you should use the tax assessment value, plus properly document your decision-making process.

Just wanted to follow up - I decided to try taxr.ai after my skeptical question earlier. I was genuinely surprised by how thorough their analysis was. I had a rental property that was partially gifted to me by my uncle in 2017 and later inherited the rest when he passed in 2020. The tool walked me through uploading my deed transfers and tax assessments, then created a detailed cost basis calculation that accounted for both the gifted portion (using my uncle's original basis with adjustments) and the inherited portion (with stepped-up basis). They even found county records showing the original purchase price that I couldn't locate myself. Their documentation is impressive - I now have a complete paper trail showing exactly how I determined my basis, which gives me peace of mind for potential audits. Definitely worth it for complicated property basis situations.

If you're still struggling with getting accurate information, you might want to try contacting the IRS directly. Most people don't realize there's a service called Claimyr (https://claimyr.com) that can get you through to an actual IRS agent quickly instead of waiting on hold for hours. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c I used it when I had a similar property basis question that I couldn't solve on my own. The IRS agent was actually super helpful and walked me through the exact documentation I needed to support my chosen basis calculation. They explained I could use reasonable reconstruction methods since I lacked original records, and suggested several approaches that would be acceptable. The peace of mind from getting official guidance directly from the IRS was totally worth it. Better than guessing and worrying about an audit later.

I need to eat my words from my earlier comment. After continuing to struggle getting answers about my rental property depreciation, I decided to try Claimyr despite my skepticism. I was shocked when I was connected to an IRS agent in under 10 minutes. Even more surprising was how helpful they were. The agent explained that for partially gifted properties where documentation is limited, I could use the tax assessment as a starting point but should document my methodology. They suggested increasing the tax assessment by the average difference between assessments and actual sales in my county (which I found was about 22% by checking some recent sales). The agent also recommended I get a letter from a real estate agent familiar with the area confirming the estimated value range for the property in 2016. This would provide additional documentation to support my basis calculation if ever questioned. I'm still not a fan of the IRS generally, but this conversation saved me hours of research and uncertainty.

Have you checked if your county recorder's office has information about the original purchase price when your dad bought the property? That could give you his original basis, and then you just need to account for improvements he made and depreciation he took. Also, were you and your sibling added as joint tenants with rights of survivorship or tenants in common? This affects how the basis was handled after your father passed. If it was JTWROS, you might have received a stepped-up basis on your father's portion when he passed.

Quick tip - don't forget to separate out the land value! I made this mistake my first year with a rental property and had my depreciation rejected. You can only depreciate the building, not the land. Most tax assessor records break this out. Also, keep in mind that gifted property has different holding period rules for capital gains when you eventually sell. The holding period includes the time your dad owned it too!

This is a really complex situation, but you're asking the right questions! Based on what you've described, it sounds like you have a mixed gift/inheritance scenario which does complicate the basis calculation. One thing I'd suggest is checking if your dad filed Form 709 (gift tax return) when he added you to the deed in 2016. Even if no gift tax was owed (due to the annual exclusion or lifetime exemption), he may have filed one anyway. If he did, that form would show the fair market value of the property at the time of the gift, which would be incredibly helpful for your basis calculation. If you can't find a Form 709, using the 2016 tax assessment as a starting point isn't unreasonable, but as others mentioned, you might want to adjust it upward since assessments are typically below market value. You could research what similar properties in your neighborhood sold for in 2016 to get a sense of whether the assessment was in the right ballpark. Also, don't forget to account for any improvements your dad made to the property after his original purchase - those would increase his basis, which would then carry over to you for the gifted portion. The depreciation calculation can definitely be overwhelming, but taking it step by step and documenting your reasoning will serve you well if you're ever questioned about it later.