Property Acquired from a Decedent and the Consistent Basis Requirement

Under IRC Section 1014, the basis of property acquired from a decedent is the fair market value of the property on the date of the decedent's death. [IRC § 1014(a)(1).] The provisions of IRC Section 1014, along with the Treasury Regulations under IRC Section 1401, contain the rules for determining the basis of property acquired from a decedent. Under the provisions of IRC Section 1014, if the executor of the estate elects alternate valuation on the estate tax return, then the basis of property acquired from the decedent is determined as of the alternate valuation date. The basis determined under the inherited property provisions of Section 1014 and the Treasury Regulations is often referred to as stepped-up basis. In 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 amended IRC Section 1014 to provide that the basis of inherited property must be consistent with the estate tax return. [Pub L No 114-41, 114th Cong, 1st Sess, § 2004(a) (July 31, 2015); IRC § 1014(f).] Recently, the Internal Revenue Service and Treasury Department issued proposed regulations providing guidance on this new provision found in IRC Section 1014(f). [81 FR 11486 (March 4, 2016).

Basis of Inherited Property. The basis of property acquired from a decedent is the fair market value of the property on the date of the decedent's death. [IRC § 1014(a)(1).] If the executor elects alternate valuation on the estate tax return, then the basis is determined as of the alternate valuation date. [IRC § 1014(a)(2).] An alternate valuation date election means that if the property acquired from the decedent is disposed of within six months of the decedent's date of death, its basis is its fair market value on the date of disposition. If the property is held for at least six months after the decedent's date of death, its basis is its fair market value on the date six months after the decedent's date of death. [IRC § 2032.] If special use valuation is elected for farm or business property, the property's basis is its special use value. [IRC § 1014(a)(3).]

The basis determined under these inherited property provisions is often referred to as stepped-up basis. The accuracy of this label is reflected in the inflationary bias of the economy where most property is worth more when acquired from a decedent than it was when acquired by the decedent. The effect of the stepped-up basis rule is to eliminate any income tax on appreciation of the property that occurred before the decedent's death. If property has deteriorated in value, however, the person acquiring the property from the decedent may have a stepped-down or lower basis than that of the decedent. In light of this rule eliminating inherent loss in property of the decedent, estate planners should plan to sell loss property of a terminally ill person before an impending death.

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What is the consistent basis requirement, and when does it apply? Section 1.1014-10(a)(1) of the proposed regulations restates the general rule of IRC Section 1014(f) and provides that the taxpayer's initial basis in property described in Section 1.1014-10(b) of the proposed regulations may not exceed the property's final value, which is defined in Section 1.1014-10(c). ²³ Section 1.1014-10(a)(1) of the proposed regulations further provides that the consistent basis requirement applies whenever the taxpayer reports to the IRS a taxable event with respect to the property acquired from a decedent, such as depreciation or amortization, and that the requirement continues to apply until the property is sold, exchanged, or otherwise disposed of in one or more transactions that result in gain or loss recognition for Federal income tax purposes. [Prop. Treas. Reg. § 1014-10(a)(1).] In addition, Section 1.1014-10(a)(1) of the proposed regulations provides that the consistent basis requirement applies regardless of whether the property owner on the date of the sale, exchange, or disposition is the same taxpayer who acquired the property from the decedent or as a result of the decedent's death. [Prop. Treas. Reg. § 1014-10(a)(1).] 

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Effective date of the proposed regulations. The preamble and proposed regulations state that the proposed regulations apply to property that is acquired from a decedent or by reason of the death of a decedent whose return required by IRC Section 6018 is filed after July 31, 2015. [Preamble, 81 FR 11486 (March 4, 2016); Prop. Treas. Reg. § 1014-10(f).]

The preamble and proposed regulations state that persons may rely upon the proposed rules before the date of publication of the Treasury Decision that adopts the rules as final in the Federal Register. [Preamble, 81 FR 11486 (March 4, 2016); Prop. Treas. Reg. § 1014-10(f).]

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx.15 pages)

RELATED LINKS: For more information on the basis of property inherited from a decedent, please see:

• 1-14 How to Save Time and Taxes Preparing Fiduciary Income Tax Returns § 14.01 et seq.  – Basis of Donated and Inherited Property