Basis In Inherited Property
May 15, 2017
A beneficiary of an estate will often receive property other than cash as a part of an inheritance. It is common for the beneficiary to be unfamiliar with the circumstances under which the decedent obtained the property or the price paid by the decedent for the property. When a beneficiary decides to sell inherited property, either immediately upon receipt or at some later time, it is important for the beneficiary to know his or her cost basis in the property for purposes of determining gain or loss.
In general, basis in property inherited from a decedent who died before or after 2010 is either: (i) the fair market value of the property on the date of the decedent’s death, or (ii) the fair market value of the property on the alternate valuation date (if the executor of the decedent’s estate chooses to use an alternate valuation).
Despite these general rules, there are some notable exceptions. For example, under a special-use valuation rule, the executor of an estate can, for federal estate tax purposes, elect to value qualified real property on the basis of its actual use for farming or closely held business purposes rather than on the property’s fair market value. In these situations, the basis of such property in the hands of the beneficiary is the value used under the special use-valuation method and not the property’s fair market value. Additionally, if a beneficiary inherits property subject to a qualified conservation easement, the beneficiary’s basis in that property will generally be equal to the decedent’s adjusted basis in the property to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement. Moreover, if a federal estate tax return does not have to be filed (for example, if the decedent’s gross estate is less than $5,490,000 in 2017), then the beneficiary’s basis in inherited property will generally be equal to the property’s appraised value as of the date of death for Pennsylvania inheritance tax purposes.
Special rules apply for determining basis in jointly owned property. If spouses held property as either tenants by the entirety or as joint tenants with right of survivorship, then the surviving spouse’s basis in the property is the cost of the survivor’s half of the property with certain adjustments. The cost must be reduced by any deductions allowed to the surviving spouse for depreciation and depletion, and the reduced cost must be increased by the survivor’s basis in the half inherited.
If a non-spouse beneficiary and a decedent owned property as joint tenants with right of survivorship, the beneficiary’s basis in the property is determined based on a contribution rule. The contribution rule provides that the beneficiary’s basis in jointly owned property will be determined based on the proportionate amount the beneficiary contributed to the original purchase price and, with respect to depreciable property, the way the beneficiary had been allocated income from the property.
If a beneficiary receives appreciated property from a decedent and that beneficiary (or the beneficiary’s spouse) gave the property to that decedent within one year before the decedent’s death, the beneficiary’s basis in the property is the same as the decedent’s adjusted basis in the property immediately before death. Thus, a basis step-up cannot be obtained by transferring property to a decedent immediately before death with the intent that the property be returned to the donor.
If a beneficiary inherited property from an individual who died in 2010, the beneficiary’s basis in the property depends on whether the executor of the decedent’s estate made a “Section 1022 election.” If the executor did not make a Section 1022 election, the beneficiary’s basis in the inherited property is determined under the general rules previously described. If the executor did make a Section 1022 election, the basis of property acquired from the deceased individual generally is determined under the modified carryover basis rules of Section 1022, which provide that the beneficiary’s basis is the lesser of the decedent’s adjusted basis or the fair market value at the date of the decedent’s death, increased by any allocation of “Basis Increase” (with certain other adjustments).
Lastly, the basis of certain property acquired from a decedent cannot exceed the value of that property as finally determined for federal estate tax purposes. If the value is not finally determined for federal estate tax purposes, the beneficiary’s basis cannot exceed the value of that property as reported on Form 8971.
There are many rules that apply to determining a beneficiary’s basis in inherited property, and those rules can be complex. It is advisable for a beneficiary to have a clear understanding of his or her basis in inherited property at the time the property is received, as it can be difficult to determine basis in inherited property many years after the estate has closed. If you have questions concerning basis in property you inherited, please contact a member of the McNees’ Estate Planning Group or Andrew Rusniak at ARusniak@McNeesLaw.com to assist you.
© 2017 McNees Wallace & Nurick LLC
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