Depreciation Deductions Reduce Tax Basis
Question: For more than twenty years my father has owned a four-plex apartment building in east Mesa. My father is terminally ill, and his doctor has told him that he only has a few weeks to live. My father is trying to get his affairs in order. I am his only child, and he wants to deed this four-plex apartment building to me now. When I get the deed to me for the four-plex apartment building I intend to sell the building immediately, as I do not want to be a landlord. Is there an advantage to my father deeding this building to me now before he passes away in a few weeks?
Answer: Probably not. In fact, there is probably a disadvantage. If your father deeds the building to you now, you take over your father’s tax basis. After more than twenty years this tax basis, due primarily to depreciation deductions, is probably much less than its current value. Therefore, if you then immediately sell the building you will be obligated to pay capital gains taxes on the difference between this tax basis and the value of the apartment building at the time of sale. On the other hand, if you inherit the building after your father’s death, there will be a step-up in tax basis to its value at that time. Therefore, if you immediately sell the four-plex apartment building after your father’s death, there should be no capital gains taxes.