Step-up in Basis for Rental Property Depreciation After Death - Questions about Trust to LLC Transfer

Thanks for this explanation! Just to clarify, if the beneficiaries held the property for say 6 months before contributing to the LLC, would they start depreciating at the stepped-up basis during those 6 months, and then the LLC continues from there? Or does the clock "reset" for the 27.5 year schedule when the LLC takes ownership?

Yes, the beneficiaries would start depreciating the property using the stepped-up basis during those 6 months they held it. They would use the residential rental property depreciation period (typically 27.5 years) starting from when they acquired it. When transferred to the LLC, the LLC essentially steps into the shoes of the contributing partners. The LLC continues the same depreciation schedule that was started by the beneficiaries - it doesn't reset the 27.5 year clock. The LLC would continue depreciating the remaining balance over the remaining years in the depreciation schedule.

Thank you so much for the clear explanation! So just to make sure I'm understanding: 1. We (beneficiaries) got the step-up in basis as of August 2021 (death date) 2. No recapture needed on the deceased's final return 3. When we contributed to the LLC, the basis carried over (no second step-up) 4. The LLC continues depreciation on the stepped-up basis That's exactly what I needed to know. One last question - for depreciation calculations, would we use the full FMV as of date of death, or would we need to subtract the value of the land since only the structure is depreciable?

You've got it exactly right on all four points! Perfect understanding. For depreciation calculations, you'll need to allocate the stepped-up basis between land and building, as you correctly noted that only the structure is depreciable. The land portion is not depreciable. You should determine the fair market value of the entire property at date of death, then allocate a reasonable portion to land and the remainder to the building. This allocation could be based on property tax assessments, appraisals, or other reasonable methods. The building portion is what you'll depreciate over 27.5 years.

Does this actually work for properties that were transferred multiple times? Like in this case where it went from trust to beneficiaries to LLC? I'm in a similar situation but with even more transfers and I'm so confused about basis.

I'm skeptical - how is some AI tool supposed to know the fair market value at date of death? Don't you need an actual appraisal for that? And how does it handle the land vs building allocation?

Yes, it absolutely works for multiple transfers! I had a property that went from my mom's name to her trust, then to me and my brother, and finally to our LLC. The tool has you identify each transfer event and applies the correct tax treatment to each step. It maintains the chain of basis adjustments through each transfer. For fair market value questions, you're right that you need a starting value. You can input an appraisal value if you have one, or it can work with county tax assessments or even comparable sales data that you provide. For the land vs. building allocation, it uses either the values from property tax records or a standard ratio based on your location, but you can override those if you have better information.

How does this actually work? Do they just sit on hold for you? And how do they know what department or which option to select in the IRS maze?

Yeah right, this sounds too good to be true. The IRS is impossible to reach, especially for complex questions like basis and depreciation. I doubt they just magically get through when millions of others can't.

They have a system that navigates the IRS phone tree and waits on hold for you. You tell them what department you need (for this kind of question, you'd want the business tax line), and they know all the right options to select. Their system just waits on hold instead of you doing it. The service was created by people who got frustrated with the same problem we all have - spending hours on hold. They don't have any special "in" with the IRS, they just handle the frustrating hold time for you. When an actual IRS agent picks up, you get a call connecting you directly to that person. I was skeptical too, but for complicated tax questions like basis calculations, sometimes you really do need to hear it directly from the IRS.

Is a retroactive appraisal expensive? I inherited a property 8 months ago and just realized I should have gotten an appraisal at that time. Now I'm worried about establishing the correct stepped-up basis.

A retroactive appraisal typically costs about 15-20% more than a standard appraisal - so instead of $500-600, you might pay $575-720 depending on your area and property type. Most appraisers can do this by researching comparable sales from around the date of death. I'd say it's worth the expense for the peace of mind and documentation, especially if the property is valuable. If your property is lower value, sometimes the county's assessed value or even Zillow estimates from that time period might be acceptable if you document your methodology. The key is having some reasonable basis for your valuation that you can defend if questioned.

Yes, the step-up in basis essentially wipes the slate clean. Your uncle's failure to take depreciation (even though he was entitled to it) becomes irrelevant once you receive the stepped-up basis at date of death. You start fresh with the new basis and depreciation schedule. That's actually one of the nice benefits of the step-up rules for heirs.

That's really helpful information about potentially amending the deceased's returns! I hadn't considered that angle. Quick question - is there a time limit for filing those amended returns for missed depreciation? And does it complicate things if the property has already been transferred to beneficiaries and then to an LLC like in the original post? I'm asking because I'm wondering if @Levi Parker might want to look into this for their situation too, since they mentioned the original owner took proper depreciation in 2019-2020 but who knows about earlier years.