Correcting a $25,000 Tax Error for a Married Couple

Client Profile:

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Married couple who inherited multiple rental properties from a parent several years ago. Both properties continued to be rented, and the clients had been filing annual Schedule E returns.

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The Issue:

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In the year they sold both inherited rental properties, they were surprised by a very large capital gain, much higher than expected, and resulted in an exceptionally high tax bill.

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Upon review:

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• The previous accountant never applied the step-up in basis at the date of inheritance.
• The assets had also never been properly allocated between land vs. building, which
  overstated depreciation recapture.
• Previously accumulated passive loss carryforwards were understated due to incorrect
  depreciation tables from prior years.

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What We Did:

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• Reconstructed the correct stepped-up basis values as of the parent’s date of death using
  appraisal data and market comps.
• Allocated the correct portions of each property to land and building.
• Corrected depreciation schedules for each year since inheritance.
• Recalculated capital gain based on the adjusted (stepped-up) basis.
• Amended prior year returns to properly apply passive loss carry forwards.

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Result:

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• Capital gains tax liability was reduced by over $25,000.
• Depreciation recapture was reduced significantly due to proper land/building allocation.
• Passive losses corrected created an additional $5k in tax savings
• All amended returns prepared and filed to correct historical errors.

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Outcome for Client:

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The clients went from owing over 25,000 less in federal taxes and gained peace of mind that the property sale was finally reported correctly according to tax law.

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