If I purchase a home and immediately rent it to my daughter. What would be the tax situation if she were to inherit it after I pass? How would the depreciation taken enter into the picture? Some figures to work with: Purchase price of home $250,000...land value $25000 Yearly depreciation appoximately 8000 year Assume I pass 10 years after the purchase date.
Under current estate tax law your daughter's basis would be the fair market value on your date of death (or alternative date if properly elected by the executor). All the tax attributes created in your lifetime (such as depreciation recapture) would disappear.
What depreciation? You're renting to an immediate family member and such is considered PERSONAL use. Personal assets are not depreciable.
Aren't you assuming he's not getting fair market rent from his daughter?
Use by a family member is not considered personal use if the family member uses the dwelling unit as his/her main home and pays FMV rent.
--Mark B.
The OP has the burden of proof that it's an "arm's length" transaction (i.e. FRV).
If he charges market rent, that should be all he needs to show.
I find this to address the FRV; Fair rental price. A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area.
Which is vague enough. The rent can be less, just not "substantially" less. I'd imagine one can justify some delta as a relative would be less likely to trash the place and perform more simple maintenance. /Joe
Just to be sure I understand.........if I charge close to FRV, then upon my passing my daughter could inherit the home at the FMV at the time of my death and any depreciation I took while renting to her would not need to be recaptured if she decides to sell the home at a later date. Is this a correct conclusion?
Yes. You got it. By mentioning the depreciation, you understand the Sch E reporting of rental property and everything that goes along with that. She gets a stepup to current market value at the time you pass (or six mo later depending how estate executor handles.) I wish you well and hope that stepup is many decades away. /Joe
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