Depreciation - Undivided interest property

Forum|Forum|3 years ago
February 26, 2023
6 replies
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father sold son 50% undivided interest in property: house, farm buildings, 80 acres

I'm doing both father and son's tax returns. I have questions concerning both returns.

1) for father - do I report sale using 50% of the farm buildings/land cost or do I leave his cost as is and just report a capital gain sale of "50% undivided interest" without a cost basis

2) for son - do I enter the cost as the 100% value determined in the purchase agreement then depreciate as 50% or list the 50% of farm buildings value as the cost

Am I overthinking this...... Thanks for any help you have to offer I don't think this is in Pub17

ProSeries Professional

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Best answer by rbynaker

Isn't that just Tenancy-in-Common?

https://www.thetaxadviser.com/issues/2016/nov/fractional-interests-in-property.html

So they each own 50% of the property? The devil's in the details but you're probably splitting all of Dad's assets into two (50% basis/accum depr) and then selling the new "half". The old half would continue to depreciate.

Son then places his new "half" of property in service and starts fresh depreciation from the purchase price.

The bigger mess is probably dealing with income/expenses going forward. I'd punt, but then I don't like volunteering to deal with other people's headaches.

IRonMaN

Level 15

I checked and it isn't in Pub 17. I even checked Pub 16 and 18 just to be safe. I would like to help but you are talking a foreign language to me so I'm going to let someone that is multilingual help you.

Slava Ukraini!

dkhAuthor

Level 15

Thanks Ironman. I've had a lot of farm sales - first undivided interest sale I've encountered.

rbynakerAnswer

Level 13

Isn't that just Tenancy-in-Common?

https://www.thetaxadviser.com/issues/2016/nov/fractional-interests-in-property.html

So they each own 50% of the property? The devil's in the details but you're probably splitting all of Dad's assets into two (50% basis/accum depr) and then selling the new "half". The old half would continue to depreciate.

Son then places his new "half" of property in service and starts fresh depreciation from the purchase price.

The bigger mess is probably dealing with income/expenses going forward. I'd punt, but then I don't like volunteering to deal with other people's headaches.

dkhAuthor

Level 15

I don't believe the tenancy-in-common and the undivided interest are the same. But I don't really know that.

The father and son are not cost-sharing the farming.

I don't expect anyone to volunteer to deal with my headaches. Just looking for someone with experience with this type of transaction. I'm not finding anything helpful on the WWW

Thanks for your input. @rbynaker

rbynaker

Level 13

Sorry, I didn't mean to imply that you were making this my headache and certainly didn't mean to offend. You're probably my favorite person here whose contact info I don't already have. (I like to travel and have met at least a half-dozen folks from here in my travels.)

To clarify, this is the client's headache (of their own making), not yours! It also likely creates a conflict of interest for you if you are considering representing both parties to a financial transaction. The son's best interests and the father's could very well be at odds, both in this one transaction and in the activities of the joint property going forward. No problem telling them that you're not comfortable representing them in this situation.

Rick

PATAX

Level 12

I couldnt find much in four different tax reference books. but under lawprofessors.typepad.com : under agricultural law and taxation blog: there are articles that may have some information. may want to use your smart phone to access this just in case viruses,etc.

BobKamman

Level 15

Sounds like a case of hillbilly probate. They share ownership (sounds like tenants in common to me) but not income and expenses? Was there actually money paid by the son to the father for his half? Maybe, after father gave the son a gift of the same amount? And how did they arrive at the purchase price? FMV? Any gift tax return filed? Is there a mortgage on the property?

For farm questions, see Pub 225, which goes into 17 about 13 times. But they don't have a chapter on Goofy Family Deals.