Gifted Property and Depreciation Restarting

Does anyone know the answer to this question: if there is a gift of 1245 or 1250 property from donor father to donee son, does the son need to restart depreciation? The basis will be the same under 1015 but the depreciation period and start date restarts when the gift was received?

Any ideas on how to keep track of this for 1245 recomputed basis purposes in Lacerte.

What if the gift was of a partnership interest that owns 1245 property? If the property were within a partnership, would this problem be avoided?

https://www.cchcpelink.com/depreciation-of-assets

168(i)(7) Planning Treatment of certain transferees.

168(i)(7)(A)(A) In general. In the case of any property transferred in a transaction described in subparagraph (B), the transferee shall be treated as the transferor for purposes of computing the depreciation deduction determined under this section with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. In any case where this section as in effect before the amendments made by section 201 of the Tax Reform Act of 1986 applied to the property in the hands of the transferor, the reference in the preceding sentence to this section shall be treated as a reference to this section as so in effect.

168(i)(7)(B)(B) Transactions covered. The transactions described in this subparagraph are—

168(i)(7)(B)(i)(i) any transaction described in section 332, 351 , 361, 721 , or 731, and *NOTE* this section specifically excludes 1015*

168(i)(7)(B)(ii)(ii) any transaction between members of the same affiliated group during any taxable year for which a consolidated return is made by such group.

168(i)(7)(C)(C) Property reacquired by the taxpayer. Under regulations, property which is disposed of and then reacquired by the taxpayer shall be treated for purposes of computing the deduction allowable under subsection (a) as if such property had not been disposed of.

Yes, depreciation is restarted in the case of a gift. I've never seen anything to the contrary.

If you believe that Sec. 1245 recapture will apply to the depreciation taken prior to the gift, then you can enter a separate asset, called "Depreciation prior to gift" or something like that, to the asset sheet, with basis equal to the depreciation taken and prior depreciation of the full amount. Your software should prevent any more depreciation being taken on the "fictitious" property. When the underlying property is sold, you can indicate it as a group sale. (I believe based on my own interpretation that 1245 applies to depreciation prior to the gift, but as far as I know there is no statute or regulation directly answering this question.)

In the case of gifting a partnership interest, depreciation (for the partnership) continues undisturbed, but I have no idea how this interacts with Sec. 704.

In the case of gifting a partnership interest, depreciation (for the partnership) continues undisturbed, but I have no idea how this interacts with Sec. 704.

Make sure to consider any suspended PALs attached to this interest are removed from the giftor's return and increase the basis to the giftee. I've only ever done this with s-corp stock. Not sure how that would be handled from a depreciation standpoint, if anything.

I’ve always read that as the donee takes the property is it was held by the donor: depreciation is the same as held by the donor. No restart.

I believe this is only in the case of the specific transactions listed in 168(i)(7)(B)(i).

Wolter Kluwers Master Depreciation Guide appears to agree with Joanmq. See “How to Depreciate Gifted Property” on page 74 of the 2016 issue, which you can view here:

https://www.scribd.com/document/3510284 ... t-brochure

How to depreciate gifted property.
Assuming MACRS applies to gifted property and the property was being depreciated by the donor, it appears the donee shouldcontinue depreciating the adjusted basis of the gifted property over the remainingMACRS recovery period using the donor’s method and convention. Normally, thisis advantageous to the donee since the adjusted (carryover) basis will be recoveredin a shorter period of time than if the depreciation period is restarted. Note,however, that the bonus depreciation deduction should not apply to the carryover basis since the original use of the property does not begin with the donee (see¶127D). Similarly, property with a carryover basis does not qualify for the section179 allowance (Code Sec. 179(d)(2)(C)). Although there are no MACRS regulations dealing specifically with the depre-ciation of gifted property, ACRS proposed regulations would have extended thestep-in-the shoes rule for nonrecognition transactions described in former CodeSec. 168(f)(10) to gifted recovery property (Proposed Reg. §1.168-5(f)(3) at ¶540). Thus, under the proposed regulation, the donor’s adjusted basis of gifted property immediately prior to the gift is depreciated using the remaining recovery period of the asset and same recovery period and convention. To the extent that the adjustedbasis is increased, such as on account of the payment of gift tax, the increase isdepreciated separately as newly acquired property. Some background informationcan be found in Field Service Advice Memorandum 0746, May 19, 1993.Significant support for depreciating the carryover basis of gifted property usingthe donor’s remaining recovery period is also found in the safe harbor guidance for executors that make an election under Code Sec. 1022 to treat property acquiredfrom a decedent dying in 2010 as a gift (Rev. Proc. 2011-41). See below, “
Special rule for decedents dying in 2010 if Code Sec. 1022 election is made to treat transfer as gift.
 The contrary rationale to treat MACRS gifted property as newly acquiredproperty to be depreciated with a fresh depreciation period is that Code Sec. 168contains only one provision which explicitly requires the recipient of property tocontinue depreciating the property using the method and remaining depreciationperiod of the transferor. Specifically, Code Sec. 168(i)(7) applies this rule tononrecognition transactions described in Code Secs. 332, 351, 361, 721, and 731(similarly to former Code Sec. 168(f)(10) under ACRS). See ¶144. Since a gift transfer is not explicitly mentioned in Code Sec. 168(i)(7), the carryover basis may arguably be depreciated like new property.

Hmm. That's news to me, and I'm willing to change my view, but this language:

it appears the donee should continue depreciating the adjusted basis

Doesn't sound very definitive, and they state the argument to the contrary right after.

So this looks like something where reasonable people could disagree.

It has the same basis as it did in the hands of the donor. So you'd continue with whatever was going on. If it's personal property now turned to biz, you'd depreciate only on the donor's basis.

There is always the case where fair market value is less than donor's basis.

Wolter Kluwers Master Depreciation Guide appears to agree with Joanmq. See “How to Depreciate Gifted Property” on page 74 of the 2016 issue, which you can view here:

https://www.scribd.com/document/3510284 ... t-brochure

Thanks for the support! Appreciate everyone's responses.