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I can't put my finger on the article I read recently, but I have a client who had been purchasing a piece of rental property under a personal contract with a non relative. He's been depreciating the purchase price (less the value of the land) for a while now. In Sept 2001, the contract holder died. Her will states the personal contract will be considered paid in full upon her death and the property is my client's.

In our state, civil law states that title does not pass until the personal contract is paid in full. So the lawyers are now in the process of transferring title to my client. My question is, does he now get a stepped up in basis and start depreciating the increase in basis as if he acquired the property in 2001? I means does he continue the original depreciation and do a second calculation for the stepped up value? Does part of the stepped up value have to be applied to land?

I sure hope one of my fellow tax pros has a clue. I haven't found anything in my references that addresses this situation. Thanks in advance.

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