Price Law Firm APC

Tax Basis of Property Received from a Decedent
people, man, woman

R. Sam Price, J.D., LL.M. Certified Specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization

Cost Basis

Basis is the way the tax code keeps track of your investment in property.  When you purchase property, your basis is the cost basis (what you paid for the property).

For example, Jim buys property for 10.  His  basis in the property for the calculation of gain or loss is 10.  If Jim later sell the property for 12, then his gain is 2.

Transferred Basis

After you own the property, you can gift it away.  The basis of the property to the person who receives the property is a transferred basis.  The basis to the donee is the same as the basis of the property to the donor.  The basis transfers with the property.

Let’s say that Barbara bought property for 10.  Then, she gives it away during her lifetime to Steve, when the property was worth 12.  Steve’s basis in the property is equal to Barbara’s basis in the property, which is 10.  If Steve were to sell the property for 12, then he would have 2 of gain.

Step-Up in Basis

Generally, the basis of property received from a decedent is the fair market value at the date of death of the decedent according to IRC § 1014. This is generally called a “step-up” in basis, so long as the property has increased in value in the hands of the decedent. The heirs to the property will receive a basis equal to fair market value at the date of death. The benefit to the heirs is to reduce or eliminate capital gains on the property when it is sold.

However, if the property is a depreciating asset, such as a car, boat, or other asset that has decreased in value in the hands of the decedent, then IRC § 1014 will act as a “step-down” in basis.

For example, Sally bought property for 40.  It is now valued at 70.  If she were to sell it, then she would have 30 of gain.  However, if Sally gives the property at her death to Harry, then the basis of the property for Harry would be 70 (the fair market value of the property at Sally’s death).  Then, when Harry sells it for 70 and his basis is 70, he has no gain or loss on the sale.

Step-Up in Basis of Community Property

A special rule applies to step-up of basis in community property under IRC § 1014(b)(6). When a spouse dies owning community property, the total fair market value of the community property, including the part that belongs to the surviving spouse, becomes the basis of the entire property. For this rule to apply, at least half of the value of the community property must be includible in the decedent spouse’s gross estate, whether or not the estate must file a return.

For example, Bill and Jenny are a married couple in California and they own a property as community property which they bought for 60.  When Bill dies, the property is worth 90.  Because they owned the property as community property, the basis of the property in Jenny’s hands would be 90.  If she sells it for 90, then there would be no gain or loss on the sale.

Reporting Basis of Certain Property Form 8971 (I.R.C. 6035)

If the estate of the decedent files a Form 706 US Estate Tax Return, then the executor is required to report the final estate tax value of property distributed from the estate on Form 8971.  Each beneficiary receives Schedule A of Form 8971, which reports the value of property received from the estate. The beneficiary cannot use a value that is higher than the value reported on Schedule A as the beneficiary’s initial basis in the property.

Form 8971 is a separate filing requirement from the Form 706, and should not be attached to the Form 706. Form 8971 is required to be filed 30 days after the estate tax return is due, or 30 days after it is filed. Failure to file by the due date or to furnish correct Schedules A to beneficiaries will impose very high penalties.

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