Cost Basis Inherited Property that is now a Rental
For the first time I'm trying to do my taxes with FreeTax USA for 2024 but running into trouble reconciling numbers with my bookkeeper for 2023.
I inherited a property with my sister and rented it out in mid 2023. I looked through his file and he is showing $130,000 cost basis. But when I got the appraisal done in 2023, it was listed as $300,000. Shouldn't his cost basis be $150,000?
I can't ask him as I'm no longer going to him. Do I need to refile for 2023? If his cost basis is lower, doesn't that technically benefit the IRS? I'm just worried about being audited and don't mind if I paid more taxes in 2023 due to the lower cost basis. and I'm looking to not have to amend my 2023.
and for 2024 would I be able to use the correct cost basis to $150,000?
Answers
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Hi ConfusedwithTaxes, this is an interesting question.
This one recommendation to consider. If the depreciation difference is small and you’re not selling the property soon, you can keep using the $130,000 basis to stay consistent.
I've broken down parts of the question below:
- Cost Basis for Inherited Property -When you inherit a property, your cost basis is usually the fair market value (FMV) at the date of death.
If you and your sister inherited it equally and the 2023 appraisal was $300,000, then your individual cost basis should be $150,000.
- Why Your Bookkeeper Used $130,000 -It's possible they used a prior appraisal, incorrect estimate, or didn’t have access to the correct FMV at the time.
Using $130,000 instead of $150,000 understates your basis, which means you’re reporting more rental income (through depreciation) and/or potentially more gain when selling — benefiting the IRS, not you.
- Do You Need to Amend Your 2023 Return? -
You’re not required to amend if the error isn’t material or if it doesn’t cause significant underpayment.
Since this lowers your depreciation deduction, the error likely resulted in you paying more tax, not less.
The IRS typically isn’t concerned if they were overpaid.
If you’re okay with that and don't want to risk triggering anything by amending, you can leave 2023 as is.
- Can You Use the Correct Cost Basis for 2024? -
Yes, you can and should use the correct cost basis ($150,000) moving forward.
However, this may create a mismatch in your depreciation schedule unless you file Form 3115 (Change in Accounting Method) to correct it officially.
If you’re using FreeTaxUSA, they do not currently support Form 3115, so you'd either need to consult a CPA or continue with the $130,000 basis until you sell the property — and then correct the gain at that point.
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