Exceptions §1014 §1014(b) Examples Regs Pub 551 Summary IRS Pub 551
Under the community property system, each spouse owns an undivided one-half interest in the community property. The other spouse may have a management power over the entire item of community property, but this power does not convert that property into that spouse's property. Under applicable state law, these principles control even though community property may be registered only in one spouse's name.
For income tax basis purposes, however, the surviving
spouse's share of community property is treated as if it were acquired
from the decedent. Therefore, the property acquires a stepped-up (or stepped-down) basis
at the time of the decedent-spouse's death, even though the property was not includible in
the decedent's gross estate. 19
/Footnote/ 19 §1014(b)(6). But see Holt v. U.S., Nos. 96-165 T and 96-356 T (Surviving
spouse's community interest in notes reported under the installment method, which are
items of IRD in the decedent's estate, is not entitled to basis step-up under §1014(b)(6)
because §1014 in its entirety does not apply to IRD).
Example—Community Property
Husband and Wife own community property that has increased from its original basis of
$100,000 to $250,000 at the time of Husband's death. For federal estate tax purposes,
Husband's one-half community interest is valued at $125,000. Wife's one-half community
interest also receives a tax basis step-up to $125,000. Having received Husband's portion
of this property at the time of Husband's death, when Wife later sells the property for
$260,000, Wife incurs an income tax liability on the $10,000 increase above the $250,000
estate tax valuation. The $150,000 appreciation accrued since the acquisition of the
property is immunized from federal income tax by reason of the basis step-up.
This rule provides an incentive, in the situation of significantly appreciated
community property, to not sever or partition the community property. If community
property is severed and, thereby, transformed into separate rather than community
property, this tax basis step-up rule will not be available.
Exceptions to Stepped-Up Basis Treatment
1. Annuities
The stepped-up basis rule does not apply to annuities. (20) Often, prior to death, this
property has a zero basis and will produce ordinary income. Accordingly, stepped-up basis
treatment is deemed to be too generous.
/Footnote/ (20) §1014(b)(9)(A).
§ 1.1013-1 Property Included In Inventory.
The basis of property required to be included in inventory is the last inventory value of
such property in the hands of the taxpayer. The requirements with respect to the valuation
of an inventory are stated in Subpart D (section 471 and following), Part II, Subchapter
E, Chapter 1 of the Code, and the regulations thereunder.
-----------------------
The basis of property that is required to be included in inventory under the taxpayer's
method of accounting is the last inventory value of the property. 178
/Footnote/ 178 §1013; Regs. §1.1013-1.
Note: This provision concerning the basis of inventory is constitutional, even though
it treats cash and accrual method taxpayers differently. 179
/Footnote/ 179 Wilson v. U.S., 376 F.2d 280 (Ct. C1. 1967).
The last inventory value is determined under the rules relating to the computation of inventory, which are discussed in ¶3590.
In general §1014 provides that there is a new (stepped up) basis at date of death:
Sec. 1014. Basis Of Property Acquired From A Decedent
1014(a) In General
Except as otherwise provided in this section, the basis of property in the hands of a
person acquiring the property from a decedent or to whom the property passed from a
decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's
death by such person, be--
1014(a)(1) the fair market value of the property at the date of
the decedent's death,
1014(a)(2) in the case of an election under either section 2032
or section 811(j) of the Internal Revenue Code of 1939 where the decedent died after
October 21, 1942, its value at the applicable valuation date prescribed by those sections,
1014(a)(3) in the case of an election under section 2032A, its
value determined under such section, or
1014(a)(4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.
(b) Property Acquired From The Decedent
For purposes of subsection (a), the following property shall be considered to have been
acquired from or to have passed from the decedent:
1014(b)(1) Property acquired by bequest, devise, or inheritance, or by the decedent's
estate from the decedent;
1014(b)(2) Property transferred by the decedent during his lifetime in trust to pay the
income for life to or on the order or direction of the decedent, with the right reserved
to the decedent at all times before his death to revoke the trust;
1014(b)(3) In the case of decedents dying after December 31, 1951, property transferred
by the decedent during his lifetime in trust to pay the income for life to or on the order
or direction of the decedent with the right reserved to the decedent at all times before
his death to make any change in the enjoyment thereof through the exercise of a power to
alter, amend, or terminate the trust;
1014(b)(4) Property passing without full and adequate consideration under a general
power of appointment exercised by the decedent by will;
1014(b)(5) In the case of decedents dying after August 26, 1937, property acquired by
bequest, devise, or inheritance or by the decedent's estate from the decedent, if the
property consists of stock or securities of a foreign corporation, which with respect to
its taxable year next preceding the date of the decedent's death was, under the law
applicable to such year, a foreign personal holding company. In such case, the basis shall
be the fair market value of such property at the date of the decedent's death or the basis
in the hands of the decedent, whichever is lower;
1014(b)(6) In the case of decedents dying after December 31, 1947, property which
represents the surviving spouse's one-half share of community property held by the
decedent and the surviving spouse under the community property laws of any State, or
possession of the United States or any foreign country, if at least one-half of the whole
of the community interest in such property was includible in determining the value of the
decedent's gross estate under chapter 11 of subtitle B (section 2001 and following,
relating to estate tax) or section 811 of the Internal Revenue Code of 1939;
1014(b)(7) In the case of decedents dying after October 21, 1942, and on or before
December 31, 1947, such part of any property, representing the surviving spouse's one-half
share of property held by a decedent and the surviving spouse under the community property
laws of any State, or possession of the United States or any foreign country, as was
included in determining the value of the gross estate of the decedent, if a tax under
chapter 3 of the Internal Revenue Code of 1939 was payable on the transfer of the net
estate of the decedent. In such case, nothing in this paragraph shall reduce the basis
below that which would exist if the Revenue Act of 1948 had not been enacted;
1014(b)(8) In the case of decedents dying after December 31, 1950, and before January
1, 1954, property which represents the survivor's interest in a joint and survivor's
annuity if the value of any part of such interest was required to be included in
determining the value of decedent's gross estate under section 811 of the Internal Revenue
Code of 1939;
1014(b)(9) In the case of decedents dying after December 31, 1953, property acquired
from the decedent by reason of death, form of ownership, or other conditions (including
property acquired through the exercise or non-exercise of a power of appointment), if by
reason thereof the property is required to be included in determining the value of the
decedent's gross estate under chapter 11 of subtitle B or under the Internal Revenue Code
of 1939. In such case, if the property is acquired before the death of the decedent, the
basis shall be the amount determined under subsection (a) reduced by the amount allowed to
the taxpayer as deductions in computing taxable income under this subtitle or prior income
tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such
property before the death of the decedent. Such basis shall be applicable to the property
commencing on the death of the decedent. This paragraph shall not apply to--
1014(b)(9)(A) annuities described in section 72;
1014(b)(9)(B) property to which paragraph (5) would apply if the property had been
acquired by bequest; and
1014(b)(9)(C) property described in any other paragraph of this subsection.
1014(b)(10) Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).
§ 1.1014-1 Basis Of Property Acquired From A Decedent.
6500652768877283
1.1014-1(a) General Rule.
The purpose of section 1014 is, in general, to provide a basis for property acquired from
a decedent which is equal to the value placed upon such property for purposes of the
Federal estate tax. Accordingly, the general rule is that the basis of property acquired
from a decedent is the fair market value of such property at the date of the decedent's
death, or, if the decedent's executor so elects, at the alternate valuation date
prescribed in section 2032, or in section 811(j) of the Internal Revenue Code of 1939.
Property acquired from a decedent includes, principally, property acquired by bequest,
devise, or inheritance, and, in the case of decedents dying after December 31, 1953,
property required to be included in determining the value of the decedent's gross estate
under any provision of the Internal Revenue Code of 1954 or the Internal Revenue Code of
1939. The general rule governing basis of property acquired from a decedent, as well as
other rules prescribed elsewhere in this section, shall have no application if the
property is sold, exchanged, or otherwise disposed of before the decedent's death by the
person who acquired the property from the decedent. For general rules on the applicable
valuation date where the executor of a decedent's estate elects under section 2032, or
under section 811(j) of the Internal Revenue Code of 1939, to value the decedent's gross
estate at the alternate valuation date prescribed in such sections, see paragraph (e) of
§ 1.1014-3.
1.1014-1(b) Scope And Application.
With certain limitations, the general rule described in paragraph (a) of this section is
applicable to the classes of property described in paragraphs (a) and (b) of § 1.1014-2,
including stock in a DISC or former DISC. In the case of stock in a DISC or former DISC,
the provisions of this section and §§ 1.1014-2 through 1.1014-8 are applicable, except
as provided in § 1.1014-9. Special basis rules with respect to the basis of certain other
property acquired from a decedent are set forth in paragraph (c) of § 1.1014-2. These
special rules concern certain stock or securities of a foreign personal holding company
and the surviving spouse's one-half share of community property held with a decedent dying
after October 21, 1942, and on or before December 31, 1947. In this section and §§
1.1014-2 to 1.1014-6, inclusive, whenever the words "property acquired from a
decedent" are used, they shall also mean "property passed from a decedent",
and the phrase "person who acquired it from the decedent" shall include the
"person to whom it passed from the decedent."
1.1014-1(c) Property To Which Section 1014 Does Not Apply.
Section 1014 shall have no application to the following classes of property:
1.1014-1(c)(1) Property which constitutes a right to receive an item of income in
respect of a decedent under section 691; and
1.1014-1(c)(2) Restricted stock options described in section 421 which the employee has
not exercised at death if the employee died before January 1, 1957. In the case of
employees dying after December 31, 1956, see paragraph (d)(4) of § 1.421-5. In the case
of employees dying in a taxable year ending after December 31, 1963, see paragraph (c)(4)
of § 1.421-8 with respect to an option described in Part II of Subchapter D.
[T.D. 6500, 25 FR 11910, Nov. 26, 1960, as amended by T.D. 6527, 26 FR 413, Jan. 19, 1961;
T.D. 6887, 31 FR 8812, June 24, 1966; T.D. 7283, 38 FR 20825, Aug. 3, 1973]
§ 1.1014-2 Property Acquired From A Decedent.
6500652768877283
1.1014-2(a) In General.
The following property, except where otherwise indicated, is considered to have been
acquired from a decedent and the basis thereof is determined in accordance with the
general rule in § 1.1014-1:
1.1014-2(a)(1) Without regard to the date of the decedent's death, property acquired by
bequest, devise, or inheritance, or by the decedent's estate from the decedent, whether
the property was acquired under the decedent's will or under the law governing the descent
and distribution of the property of decedents. However, see paragraph (c)(1) of this
section if the property was acquired by bequest or inheritance from a decedent dying after
August 26, 1937, and if such property consists of stock or securities of a foreign
personal holding company.
1.1014-2(a)(2) Without regard to the date of the decedent's death, property transferred
by the decedent during his lifetime in trust to pay the income for life to or on the order
or direction of the decedent, with the right reserved to the decedent at all times before
his death to revoke the trust.
1.1014-2(a)(3) In the case of decedents dying after December 31, 1951, property
transferred by the decedent during his lifetime in trust to pay the income for life to or
on the order or direction of the decedent with the right reserved to the decedent at all
times before his death to make any change in the enjoyment thereof through the exercise of
a power to alter, amend, or terminate the trust.
1.1014-2(a)(4) Without regard to the date of the decedent's death, property passing
without full and adequate consideration under a general power of appointment exercised by
the decedent by will. (See section 2041(b) for definition of general power of
appointment.)
1.1014-2(a)(5) In the case of decedents dying after December 31, 1947, property which
represents the surviving spouse's one-half share of community property held by the
decedent and the surviving spouse under the community property laws of any State,
Territory, or possession of the United States or any foreign country, if at least one-half
of the whole of the community interest in that property was includible in determining the
value of the decedent's gross estate under Part III, Chapter 11 of the Internal Revenue
Code of 1954 (relating to the estate tax) or section 811 of the Internal Revenue Code of
1939. It is not necessary for the application of this subparagraph that an estate tax
return be required to be filed for the estate of the decedent or that an estate tax be
payable.
1.1014-2(a)(6) In the case of decedents dying after December 31, 1950, and before
January 1, 1954, property which represents the survivor's interest in a joint and
survivor's annuity if the value of any part of that interest was required to be included
in determining the value of the decedent's gross estate under section 811 of the Internal
Revenue Code of 1939. It is necessary only that the value of a part of the survivor's
interest in the annuity be includible in the gross estate under section 811. It is not
necessary for the application of this subparagraph that an estate tax return be required
to be filed for the estate of the decedent or that an estate tax be payable.
1.1014-2(b) Property Acquired From A Decedent Dying After December 31, 1953
1.1014-2(b)(1) In General.
In addition to the property described in paragraph (a) of this section, and except as
otherwise provided in subparagraph (3) of this paragraph, in the case of a decedent dying
after December 31, 1953, property shall also be considered to have been acquired from the
decedent to the extent that both of the following conditions are met: (i) The property was
acquired from the decedent by reason of death, form of ownership, or other conditions
(including property acquired through the exercise or non-exercise of a power of
appointment), and (ii) the property is includible in the decedent's gross estate under the
provisions of the Internal Revenue Code of 1954, or the Internal Revenue Code of 1939,
because of such acquisition. The basis of such property in the hands of the person who
acquired it from the decedent shall be determined in accordance with the general rule in
§
1.1014-1. See, however, § 1.1014-6 for special adjustments if such property is
acquired before the death of the decedent. See also subparagraph (3) of this paragraph for
a description of property not within the scope of this paragraph.
1.1014-2(b)(2) Rules For The Application Of Subparagraph (1) Of This Paragraph.
Except as provided in subparagraph (3) of this paragraph, this paragraph generally
includes all property acquired from a decedent, which is includible in the gross estate of
the decedent if the decedent died after December 31, 1953. It is not necessary for the
application of this paragraph that an estate tax return be required to be filed for the
estate of the decedent or that an estate tax be payable. Property acquired prior to the
death of a decedent which is includible in the decedent's gross estate, such as property
transferred by a decedent in contemplation of death, and property held by a taxpayer and
the decedent as joint tenants or as tenants by the entireties is within the scope of this
paragraph. Also, this paragraph includes property acquired through the exercise or
nonexercise of a power of appointment where such property is includible in the decedent's
gross estate. It does not include property not includible in the decedent's gross estate
such as property not situated in the United States acquired from a nonresident who is not
a citizen of the United States.
1.1014-2(b)(3) Exceptions To Application Of This Paragraph.
The rules in this paragraph are not applicable to the following property:
1.1014-2(b)(3)(i) Annuities Described In Section 72;
1.1014-2(b)(3)(ii) Stock or securities of a foreign personal holding company as
described in section 1014(b)(5) (see paragraph (c)(1) of this section);
1.1014-2(b)(3)(iii) Property described in any paragraph other than paragraph (9) of section
1014(b). See paragraphs (a) and (c) of this section.
In illustration of subdivision (ii), assume that A acquired by gift stock of a character
described in paragraph (c)(1) of this section from a donor and upon the death of the donor
the stock was includible in the donor's estate as being a gift in contemplation of death.
A's basis in the stock would not be determined by reference to its fair market value at
the donor's death under the general rule in section 1014(a). Furthermore, the special
basis rules prescribed in paragraph (c)(1) of this section are not applicable to such
property acquired by gift in contemplation of death. It will be necessary to refer to the
rules in section 1015(a) to determine the basis.
1.1014-2(c) Special basis rules with respect to certain property acquired from a
decedent
1.1014-2(c)(1) Stock Or Securities Of A Foreign Personal Holding Company.
The basis of certain stock or securities of a foreign corporation which was a foreign
personal holding company with respect to its taxable year next preceding the date of the
decedent's death is governed by a special rule. If such stock was acquired from a decedent
dying after August 26, 1937, by bequest or inheritance, or by the decedent's estate from
the decedent, the basis of the property in the hands of the person who so acquired it
(notwithstanding any other provision of section 1014) shall be the fair market value of
such property at the date of the decedent's death or the adjusted basis of the stock in
the hands of the decedent, whichever is lower.
1.1014-2(c)(2) Spouse's interest in community property of decedent dying after October
21, 1942, and on or before December 31, 1947.
In the case of a decedent dying after October 21, 1942, and on or before December 31,
1947, a special rule is provided for determining the basis of such part of any property,
representing the surviving spouse's one-half share of property held by the decedent and
the surviving spouse under the community property laws of any State, Territory, or
possession of the United States or any foreign country, as was included in determining the
value of the decedent's gross estate, if a tax under Chapter 3 of the Internal Revenue
Code of 1939 was payable upon the decedent's net estate. In such case the basis shall be
the fair market value of such part of the property at the date of death (or the optional
valuation elected under section 811(j) of the Internal Revenue Code of 1939) or the
adjusted basis of the property determined without regard to this subparagraph, whichever
is the higher.
Basis in Property Acquired Through a Decedent
1. In General
There are two basis issues to consider when a taxpayer receives property through
intestacy, under a will, or as a surviving joint tenant. The first is the determination of
the taxpayer's basis in the property. The second, which arises in limited circumstances,
involves the effect of the heir's, legatee's, or surviving joint tenant's assumption of,
or taking subject to, an outstanding mortgage as a condition of state exoneration law, 180
as a condition of the legacy, or as a surviving joint obligor. This issue is discussed in
¶1430.02.D.4.d, below. For a detailed discussion of the basis of property received from
estates, see ¶6140.
/Footnote/ 180 E.g., Unif. Prob. Code Section 2-609 (1982).
a. Normal Valuation Situations
Generally, property acquired from a decedent has a basis equal to its fair market value at
the date of the decedent's death. 181 Fair market value is the value at which the property
is included in the decedent's gross estate. 182
/Footnote/ 181 §1014(a)(1); Regs. §1.1014-1(a).
/Footnote/ 182 Regs. §1.1014-3(a).
Example—Date of Death Value
D dies on Apr. 4, 1997. One of D's assets is land in which his adjusted basis is $40,000.
On Apr. 4, 1997, the land has a fair market value of $100,000, as reported on the estate
tax return filed by D's estate. Under D's will, the land is devised to R. R's basis in the
land is $100,000.
If no estate tax return is filed, the fair market value used for state inheritance or
estate tax purposes is presumed to be the fair market value. 183 The person to whom the
property passes may establish a different fair market value, 184 but carries a heavy
burden of proof 185 and can be estopped by inconsistent actions. 186
/Footnote/ 183 Regs. §1.1014-3(a); Duerr v. Comr., 30 T.C. 944 (1958).
/Footnote/ 184 Rev. Rul. 54-97, 1954-1 C.B. 113.
/Footnote/ 185 Cordiero Est. v. Comr., 51 T.C. 195, 203 (1968); Rev. Rul. 54-97, 1954-1
C.B. 113 (Need clear and convincing evidence).
/Footnote/ 186 Beltzer v. U.S., 495 F.2d 211 (8th Cir. 1974).
b. Alternate Valuation Date Situations
If the executor of the decedent's estate elects the alternate valuation date of six months
after the decedent's death, 187 the basis of property which is the subject of a specific
bequest is its fair market value on the alternate valuation date. 188
/Footnote/ 187 §2032.
/Footnote/ 188 §1014(a)(2).
Example—Alternate Valuation Date (1)
Refer to the preceding example. Assume that the estate elects the alternate valuation date
of Oct. 4, 1997, and reports the land on the estate tax return with a fair market value at
that date of $110,000. R's basis in the land is $110,000.
If, however, the alternate valuation date is elected and distribution of the property
pursuant to a specific bequest of the property occurs during the six-month period between
the date of the decedent's death and the alternate valuation date, the basis of the
property is its fair market value on the date of the distribution. 189
/Footnote/ 189 Regs. §1.1014-3(e).
Example—Alternate Valuation Date (2)
Refer to the preceding example. Assume that the estate distributes the land to R on Jul.
8, 1997, when its fair market value is $104,000. R's basis in the land is $104,000.
The alternate valuation date basis is reduced by any allowable depreciation for the period
between the date of the decedent's death and the alternate valuation date or distribution
date, whichever is appropriate. 190
/Footnote/ 190 Rev. Rul. 63-223, 1963-2 C.B. 100.
c. Special Use Valuation Situations
If the property is part of a farm with respect to which special use valuation is elected,
191 computation of the basis in the property begins with an amount that reflects fair
market value minus the allocable share of the difference between the fair market value and
the
special use value. 192
/Footnote/ 191 §2032A.
/Footnote/ 192 §1014(a)(3); Regs. §20.2032A-4.
Example—Special Use Valuation
Refer to the preceding examples. Assume that the land is a farm; that special use
valuation is elected; and that the farm has a fair market value of $1.2 million and a farm
use value of $800,000. On the farm is property with a fair market value of $90,000. The
basis of that property in the hands of the heir or beneficiary receiving it is $60,000
($90,000 - ($90,000/$1.2 million) x $400,000 (the difference between the $1.2 million fair
market value and the $800,000 special use value)).
2. Exceptions
a. Income in Respect of a Decedent
The rule that property received through a decedent has a basis equal to its fair market
value on the date of death or alternate valuation date does not apply to property that
constitutes income in respect of a decedent. 193 Income in respect of a decedent is
discussed in ¶6150.
/Footnote/ 193 §1014(c); Regs. §1.1014-1(b). See Cartwright Est. v. Comr., T.C. Memo.
1996-286.
b. Domestic International Sales Corporations' Stock
Basis in stock of a domestic international sales corporation or a former domestic
international sales corporation received through a decedent is not determined under the
general rule. 194 Instead, the basis that otherwise would be determined is reduced by the
amount, if any, that would have been included in the decedent's gross income as a dividend
had the decedent lived and sold the stock on the estate tax valuation date. 195 In
computing that gain, the rules for reduction of basis in domestic international sales
corporation stock that would apply if the decedent had lived are not applied. 196
/Footnote/ 194 §1014(d).
/Footnote/ 195 Id.
/Footnote/ 196 Id.
c. Appreciated Property Acquired by a Decedent Within One Year of Death
A special basis rule applies when property passes to an individual from whom or from whose
spouse the decedent acquired the property by gift within one year before the decedent's
death and, at the time of the gift, the fair market value of the property exceeded its
adjusted basis. 197 Under these circumstances, the adjusted basis of the property in the
hands of the individual receiving it through the decedent equals the adjusted basis of the
property in the hands of the decedent at the time of the decedent's death. 198
/Footnote/ 197 §1014(e).
/Footnote/ 198 Id.
Example—Appreciated Property Acquired Within One Year
B gives property with a fair market value of $150,000 and in which his adjusted basis is
$70,000 to C. C dies within one year of the gift, devising the property to B. The fair
market value of the property at the time of C's death is $160,000. B's basis in the
property, assuming that there are no intervening basis adjustments such as depreciation or
improvements, is $70,000 and not $160,000.
This limitation also applies in situations where the person from whom or from whose spouse
the decedent acquired the property is entitled to the proceeds of a sale of the property
rather than to the property itself. 199
/Footnote/ 199 Id.
d. Foreign Personal Holding Company Stock
A special rule applies to property received through a decedent that is stock or securities
of a foreign corporation which was, with respect to its taxable year next preceding the
date of the decedent's death, a foreign personal holding company under the law applicable
to that taxable year. 200 Under the special rule, the basis of the property is the lower
of fair market value as of the date of the decedent's death or the adjusted basis of the
property in the hands of the decedent. 201
/Footnote/ 200 §1014(b)(5); Regs. §1.1014-2(c)(1).
/Footnote/ 201 Id.
Foreign personal holding companies are discussed at ¶7130.
3. Property Received From a Decedent
There are a several ways in which property is considered to be acquired from a decedent,
thus having a basis equal to the fair market value at the date of the decedent's death or
the alternate valuation date. 202
/Footnote/ 202 §1014(b).
a. Direct Receipt Through Death
Property will be deemed to have been acquired from a decedent if it passes by intestacy,
bequest or devise, or is acquired by the decedent's estate from the decedent. 203
/Footnote/ 203 §1014(b)(1); Regs. §1.1014-2(a)(1). See Hummel v. IRS, No. IP 96-0934 C
M/S (S.D. Ind. 5/21/98) (Taxpayer failed to prove ownership of property; taxpayer not
devised property in will, but bequest of proceeds from sale of such property).
Example—Direct Receipt
At the time of D's death, she owned 3 parcels of land, Parcels 1, 2, and 3. D devised
Parcel 1 to R. Because of a defect in the will, Parcel 2 passed by intestacy to D's niece.
Parcel 3 was not the subject of a specific devise and was held by the estate for a few
months before it was sold. The basis of all three parcels is determined under the general
rule, because all three parcels were acquired from a decedent.
b. Lifetime Revocable Trusts
Property is deemed to have been received from a decedent if it was transferred by the
decedent during his lifetime in trust to pay the income for life to, or on the order or
direction of, the decedent, with the right reserved to the decedent at all times before
his death to revoke the trust. 204
/Footnote/ 204 §1014(b)(2); Regs. §1.1014-2(a)(2).
Example—Lifetime Revocable Trust
D, during her lifetime, transfers stock to a trust. Under the trust terms, income is to be
paid to D for life, with remainder to H. D reserves the right to revoke the trust. When D
dies, the trust property becomes H's, but does not pass through D's estate. The property H
receives from the trust is property acquired from a decedent.
c. Lifetime Trusts Under Decedent's Control
Property is deemed received from a decedent if it was transferred by the decedent during
his lifetime in trust to pay the income for life to, or on the order or direction of, the
decedent, with the right reserved to the decedent at all times before his death to make
any change in its enjoyment through the exercise of a power to alter, amend, or terminate
the trust. 205
/Footnote/ 205 §1014(b)(3); Regs. §1.1014-2(a)(3).
Example—Retention of Control
D, during her lifetime, transfers stock to a trust. Under the trust terms, income is to be
paid to D for life, with remainder to H. D reserves the right to change the remainder
interest to anyone she designates. When D dies, the trust property becomes H's, but does
not pass through D's estate. The property H receives from the trust is property acquired
from a decedent.
d. Property Passing Under Power of Appointment
Property is deemed received from a decedent if it was received without full and adequate
consideration under a general power of appointment exercised by the decedent by will. 206
/Footnote/ 206 §1014(b)(4); Regs. §1.1014-2(a)(4).
Example—Power of Appointment
F, D's father, transfers stock to a trust. Under the trust terms, income is to be paid to
M, F's son, for life, and thereafter to F's other children. By the terms of the trust, D
has the power to disbribute the assets when the last of F's children dies. When D dies, M
is alive. In her will, D appoints the trust property to M's daughter R. The property R
receives from the trust when M dies is property acquired from a decedent.
e. Foreign Personal Holding Companies
The acquisition of stock or securities in a foreign corporation, whether by bequest,
devise, inheritance, or by the decedent's estate from the decedent, will be deemed to have
been acquired from the decedent and to be subject to a special basis rule, if the
corporation was a foreign personal holding corporation under the tax law applicable to its
taxable year immediately preceding the date of the decedent's death. Under the special
rule, the basis of the property is the lower of fair market value as of the date of the
decedent's death or the adjusted basis of the property in the hands of the decedent. 207
/Footnote/ 207 §1014(b)(5).
Foreign personal holding companies are discussed at ¶7130.04.A.
f. Certain Community Property
Property is deemed received from a decedent if it is the surviving spouse's one-half share
of community property held by the decedent and the surviving spouse, if at least one-half
of the interest in the property was includible in the gross estate of the decedent. 208
Property can be characterized as community property under the laws of a state, a
possession of the U. S. or any foreign country. 209 It is not necessary that an estate tax
return be due for the decedent's estate, nor that any estate tax liability exist. 210
/Footnote/ 208 §1014(b)(6); Regs. §1.1014-2(a)(5).
/Footnote/ 209 Id.
/Footnote/ 210 Regs. §1.1014-2(a)(5).
g. Property Included in Decedent's Gross Estate
Property, which must be included in the decedent's gross estate because it is acquired
from a decedent by reason of death, form of ownership, exercise or non-exercise of a power
of appointment, or other conditions, is deemed to have been received from a decedent, 211
regardless of whether or not an estate tax return is due, or whether or not any estate tax
liability exists. 212
/Footnote/ 211 §1014(b)(9); Regs. §1.1014-2(b)(1).
/Footnote/ 212 Regs. §1.1014-2(b)(2).
If the property was acquired before the decedent's death, the basis must be adjusted to
reflect depreciation, amortization, and depletion that were allowed as deductions during
the intervening period. 213 Annuities, 214 foreign personal holding company stock or
securities, 215 or property within any of the other definitions of property acquired from
a decedent fall outside this category of property acquired from a decedent. 216 Inclusion
of property in a decedent's gross estate is discussed at ¶6190.
/Footnote/ 213 Id.
/Footnote/ 214 §1014(b)(9)(A); Regs. §1.1014-2(b)(3)(i).
/Footnote/ 215 §1014(b)(9)(B). Regs. §1.1014-2(b)(3)(ii).
/Footnote/ 216 §1014(b)(9)(C); Regs. §1.1014-2(b)(3)(iii).
h. Certain Marital Deduction Property
Property is deemed to have been acquired from a decedent if it is includible in the
decedent's gross estate because the decedent acquired the property from a spouse whose
estate employed the estate tax marital deduction rules. 217
/Footnote/ 217 §1014(b)(10), referring to the §2044 marital deduction rules.
If the property was acquired before the decedent's death, the basis must be adjusted to
reflect depreciation, amortization and depletion that were allowed as deductions during
the intervening period. 218 Property falls outside this definition if it is an annuity,
219 foreign personal holding company stock or securities, 220 or property within any of
the other definitions of property acquired through a decedent. 221 The marital deduction
rules are discussed at ¶6270.
/Footnote/ 218 Id. (incorporating §1014(b)(9)).
/Footnote/ 219 §1014(b)(10) (incorporating §1014(b)(9)(A)).
/Footnote/ 220 §1014(b)(10) (incorporating §1014(b)(9)(B)).
/Footnote/ 221 §1014(b)(10) (incorporating §1014(b)(9)(C)).
4. Computation of Basis
a. In General
Under the general rule, the basis of property acquired from a decedent is its fair market
value on the date of the decedent's death or on the alternate valuation date elected by
the estate. 222 This general rule does not apply if, before the decedent's death, the
property received is sold, exchanged, or disposed of by the person who acquired the
property from the decedent. 223 A taxpayer who acquires and disposes of an interest in
propery before the decedent's death determines the basis of the property under the
principles relating to gifts rather than under the principles relating to property
acquired from a decedent. 224
/Footnote/ 222 §1014(a)(1); Regs. §1.1014-1(a). The estate tax alternate valuation date
is prescribed in §2032.
/Footnote/ 223 Regs. §1.1014-1(a).
/Footnote/ 224 §1014(a)(1); Regs. §§1.1014-1(a) and 1.1014-3(d).
Example—Disposition Prior to Death
D gives property to X to C, reserving the right to use it for life. D does not retain any
power to revoke, alter, amend, or terminate the donation. While D is alive, C sells her
interest in X for $95,000. Assuming C's adjusted basis under the gift adjusted basis
principles is $85,000, she realizes gain of $10,000. When D dies, X has a fair market
value of $105,000. C does not readjust her basis, and may not recalculate gain or loss
realized.
b. Fiduciary Reinvestments
The basis of property acquired by a trustee, administrator, or executor as an investment
after the death of the decedent is its cost, and not its fair market value at the time of
the decedent's death. 225
/Footnote/ 225 Regs. §1.1014-3(c).
Example—Fiduciary Reinvestment
T is the trustee of a trust whose value is included in the estate of the grantor. At the
time of her death, the trust owned E stock with a value of $40,000. Two weeks after her
death, T, on behalf of the trust, sold the E stock for $42,000, its then fair market
value, and purchased A stock for $42,000. At the time of the decedent's death, the fair
market value of the A stock was $38,000. The basis of the A stock is $42,000, and not
$38,000.
c. Reinvestments of Property Acquired During Lifetime
A special rule applies if the taxpayer acquires property during the lifetime of a decedent
and reinvests that property. 226
/Footnote/ 226 Regs. §1.1014-3(d).
If the property is exchanged, or if the proceeds of its sale are used to acquire
substitute property, its basis is its fair market value at the decedent's death if the
property is included in the decedent's gross estate. 227
/Footnote/ 227 Id.
Example—Reinvested Property (1)
D establishes a trust that pays income to his children for life, remainder to his
grandchildren. He retains a power to revoke. He funds the trust with E stock in which his
basis is $10,000, and which has a fair market value of $40,000. Several years later, the
trustee sells the stock and purchases F stock for $50,000. When the decedent dies, the
fair market value of the F stock is $80,000. Because the trust is revocable, its value is
included in D's gross estate. Accordingly, the trust's basis in the F stock is $80,000.
This special rule applies to subsequent reinvestments during the decedent's lifetime. 228
/Footnote/ 228 Id.
Example—Reinvested Property (2)
Refer to the preceding example. Assume that before D dies, the trustee sells the F stock
and purchases G stock for $90,000. When D dies, the F stock has a fair market value of
$125,000, and is included at that value in his gross estate. The trust's basis in the G
stock is $125,000.
d. Adjustments to Basis of Property Acquired Before Decedent's Death
(1). In General
If property that passes through a decedent is acquired by a taxpayer during the decedent's
lifetime and is subject to allowances for depreciation, depletion or amortization, the
basis acquired at the decedent's death must be adjusted to reflect those allowances. 229
Generally, this means that the taxpayer's basis is the fair market value at the
appropriate date (death or alternate valuation), reduced by amounts allowed for
depreciation, depletion and amortization. 230
/Footnote/ 229 Regs. §1.1014-6(a)(1).
/Footnote/ 230 Id.
Example—Adjustment for Depreciation
D establishes a revocable trust that pays income to her children for life, remainder to
her grandchildren. She transfers to the trust a building that she purchased on the
preceding day for $1 million. The trust depreciates the building, using $1 million as its
depreciable basis. At the time of D's death, the building has a fair market value of $1.6
million and the trust has properly claimed depreciation deductions of $550,000. The
trust's basis in the building is $1,050,000 ($1.6 million fair market value - $550,000
depreciation).
(2). Joint Property
A modification of the general rule is necessary when the property has been held by the
decedent and the surviving spouse as tenants by the entirety or as joint tenants with
right of survivorship, and joint income tax returns have been filed. 231 In such a case,
the fair market value is reduced only by the portion of depreciation that is attributable
to the surviving spouse. 232 This is accomplished by allocating the depreciation to each
spouse in proportion to the manner in which the income from the property would have been
allocated under local law. 233 Reductions are not made for deductions allocable to the
decedent. 234
/Footnote/ 231 Regs. §1.1014-6(a)(2).
/Footnote/ 232 Id.
/Footnote/ 233 Id.
/Footnote/ 234 Regs. §1.1014-6(c)(1). See Rev. Rul. 75-142, 1975-1 C.B. 256.
Example—Joint Property (1)
A married couple, H and W, purchased a rental property, which they held as tenants by the
entirety, for $150,000. Before H's death, they claimed $50,000 of depreciation on joint
income tax returns. Under local law, each spouse was entitled to 1/2 of the income from
the property. The property's fair market value was $500,000 when H died. Under the
regulations, 1/2 of the depreciation is allocated to W. Her basis in the property is
$300,000, the sum of her basis in half of the property excluded from H's gross estate
($75,000 cost - $25,000 depreciation) plus her basis in the half acquired from the
decedent ($250,000).
Example—Joint Property (2)
Refer to the preceding example.If under local law all income is allocable to H, then none
of the depreciation is allocated to W. Her basis in the property is $325,000, the sum of
her basis in the half of the property not included in H's gross estate ($75,000), plus her
basis in the half acquired from H ($250,000).
Example—Joint Property (3)
Refer to the preceding example. If under local law all income is allocable to W, then all
of the depreciation is allocated to W. Her basis in the property is $275,000, the sum of
her basis in the half of the property not included in H's gross estate ($75,000 - $50,000
depreciation), plus her basis in the half passing from H ($250,000).
(3). Deductions Attributable to the Decedent
For property not held jointly by the decedent with a surviving spouse, two rules apply.
First, reductions are not made for deductions attributable to the decedent. 235
/Footnote/ 235 Regs. §1.1014-6(c)(1).
Example—Decedent's Deductions
D establishes a trust, income payable to D for life, remainder to R. D funds the trust
with depreciable property. Under the grantor trust rules and the trust's provisions
concerning depreciation, the trust income and its deductions are allocated to D. When D
dies, the value of the trust is included in his gross estate. R's basis in the property is
its fair market value, unreduced by depreciation.
Second, if only part of the value of the property is included in the decedent's gross
estate because of the operation of the gross estate inclusion rules, then the reduction is
only a portion of the deductions. 236 The portion equals a fraction, the numerator of
which is the value included in the decedent's gross estate and the denominator of which is
the total value of the property.
/Footnote/ 236 Id.
Example—Allocation of Deduction
D creates a trust, income to A for life, remainder to B or his estate, but if D survives
A, income is payable to D for life. D transfers to the trust depreciable property with a
basis of $150,000. D predeceases A and B. The present value of the remainder interest
included in D's gross estate is $100,000, and the value of the entire trust is $150,000.
During D's lifetime the trust properly claims depreciation deductions of $10,000. At D's
death, the basis of the property is $143,333 ($150,000 -(($100,000/$150,000) x $10,000
depreciation)).
e. Mortgaged Property
Under certain circumstances, if the taxpayer who acquires property by inheritance, bequest
or survivorship also assumes or takes subject to an outstanding mortgage, modifications
must be made to the rule that basis equals fair market value as of the date of the
decedent's death or the alternate valuation date.
If the taxpayer assumes an outstanding mortgage that is an obligation of the decedent's
estate, he has arguably purchased, rather than inherited, the property and thus would have
a cost basis. This suggestion is based on the result in one case where the taxpayer was
given a cost rather than fair market value adjusted basis in land taken subject to an
obligation to pay $2,000 to the taxpayer's brother and to pay support to the taxpayer's
mother. 237 Such a conclusion, that the basis is a cost basis, is appropriate if the
taxpayer is obligated to assume the mortgage as a condition of receiving the property. It
is not appropriate if the mortgage assumption is gratuitous, but is, in effect, a separate
gift to the decedent's other heirs or beneficiaries.
/Footnote/ 237 See Vaira v. Comr., 52 T.C. 986, 997 (1969), rev'd on other grounds, 444
F.2d 770 (3d Cir. 1971).
If the taxpayer takes subject to an outstanding mortgage that is an obligation of the
decedent's estate either because the decedent was personally liable on the mortgage or
because the property is subject to the mortgage, the individual's basis in the property is
determined under the general rule giving the taxpayer a fair market value basis. 238 This
conclusion should apply even if the amount of the mortgage exceeds the estate tax value of
the property. 239
/Footnote/ 238 See Crane v. Comr., 331 U.S. 1, 11 (1947).
/Footnote/ 239 See Comr. v. Tufts, 461 U.S. 300 (1983).
5. Uniform Basis Rules
a. In General
Under the uniform basis rules, the basis of property acquired from a decedent is the same
in the hands of every person having possession or enjoyment of the property at any time
under the will or other instrument or under the laws of inheritance. 240 This uniform
basis is used for purposes of determining depreciation, depletion and amortization,
whether the property is held by the executor, administrator, heir, legatee, devisee,
trustee of an lifetime or testamentary trust or beneficiary of such a trust. 241
/Footnote/ 240 Regs. §1.1014-4(a). See Barber v. Comr., 25 B.T.A. 513 (1932).
/Footnote/ 241 Regs. §1.1014-4(a).
The uniform basis of property in the hands of those to whom it passes through a
decedent is unaffected by the disposition by a life tenant or remainder holder of his
interest in the property. 242 Thus, gain or loss on the sale of assets by a trustee, and
the determination of depreciation, depletion and amortization are computed without regard
to prior dispositions of interests in the property by other persons. 243
/Footnote/ 242 Id.
/Footnote/ 243 Id.
b. Timing
The uniform basis for all interests in property passing through a decedent is computed as
of the date of death or other valuation date, regardless of when each person with an
interest in the property takes possession or enjoyment. 244
/Footnote/ 244 Regs. §1.1014-4(a)(2).
Note: This is because under state law all titles to property acquired by reason of the
decedent's death relate back to that death. 245
/Footnote/ 245 Id.
Example—Acquisition Relates Back
When D died, she bequeathed land to N, and directed that the residue of her estate be
placed in trust for the benefit of her nieces and nephews. The executor conveyed the land
to N 8 months after D's death. The residue was not paid to the trustees until 16 months
after the decedent's death. Nonetheless, the fair market value basis is determined as of
the date of the D's death.
c. Transfers Constituting Sales and Exchanges
The uniform basis rules do not apply when an executor, administrator, or trustee who
acquires an interest in property from a decedent transfers the property to an heir,
legatee, devisee, or beneficiary in a sale or exchange. 246 In such a case, the person
transferring the property realizes gain or loss, and the person acquiring it has a cost
basis. 247
/Footnote/ 246 Regs. §1.1014-4(a)(3).
/Footnote/ 247 Id. See Rev. Rul. 74-178, 1974-1 C.B. 196.
Example—Sale or Exchange
D dies, and under the terms of his will $10,000 must be paid to F. The estate acquired
from D stock with a fair market value of $8,000 at D's death but which, 3 months later,
has a fair market value of $10,000. At that time, the estate transfers the stock to F in
satisfaction of the bequest. The estate realizes gain of $2,000, and F's basis is $10,000.
d. Multiple Interests
If more than one person has an interest in property passing through a decedent, the basis
of the property is determined without regard to those multiple interests. 248
/Footnote/ 248 Regs. §1.1014-4(b).
Example—Multiple Interests (1)
Under the terms of D's will, property is left to L for life, with remainder to R. At the
time of D's death, the fair market value of the property is $100,000. The uniform basis of
the property is $100,000.
Thus, depreciation, depletion and amortization claimed by a life tenant reduce the
uniform basis, even to the extent of other persons with interests in the property who do
not claim such deductions. 249
/Footnote/ 249 Id.
Example—Multiple Interests (2)
Refer to the preceding example. Assume that L properly claims depreciation deductions of
$5,000. The uniform basis of the property, even as to R, is $95,000.
e. Dispositions of Interests in Property Acquired Through a Decedent
Generally, the gain or loss realized on the sale of an interest in property with a uniform
basis is measured by the difference between the amount realized and an appropriate portion
of the adjusted uniform basis. 250 The adjusted uniform basis is the uniform basis
adjusted by any basis adjustments that occurred between the date of death and the date of
disposition. 251
/Footnote/ 250 Regs. §1.1014-5(a)(1).
/Footnote/ 251 Id.
The appropriate portion of the adjusted uniform basis is determined by taking into
account the changes in the relative value of the interests in the property that occur with
the passage of time. 252 The actual computation is done using the actuarial tables 253
applicable for estate tax valuation purposes. 254
/Footnote/ 252 Regs. §1.1014-5(a)(2).
/Footnote/ 253 See Regs. §20.2031-7.
/Footnote/ 254 Regs. §1.1014-5(a)(3).
Example—Adjusted Uniform Basis
D devises land to P for life, remainder to Z. At the time of D's death, the land has a
fair market value of $100,000. That constitutes its uniform basis. No transactions
requiring adjustments occur. Several years later, when Z is age 43, he sells his remainder
interest for $20,000. Under the actuarial table, the factor for a remainder at age 43 is
.10145. Z's portion of the uniform basis is $10,145 ($100,000 x .10145). Z's gain realized
is $9,855 ($20,000 - $10,145).
The exception to this general rule applies to the sale of term and similar interests.
255 As discussed in greater detail in ¶1430.01.B.2, above, the taxpayer who sells a term
interest under these circumstances is treated as though the adjusted basis were zero. 256
/Footnote/ 255 Regs. §1.1014-5(b).
/Footnote/ 256 §1001(e).
f. Application to Adjustments for Deductions Allowed Before Decedent's Death
If more than one taxpayer has an interest in a property acquired from the decedent by
reason of death, form of ownership, or other conditions before the decedent's death is
included in the decedent's gross estate, special rules are needed to correlate the
adjustments for pre-death deductions, as discussed in ¶1430.02.D.4.d, above, with the
uniform basis rules. 257 The uniform basis, as well as the portion applicable to each
interest, must reflect the deductions allowed for the period before the decedent's death.
258
/Footnote/ 257 Regs. §1.1014-6(b)(1).
/Footnote/ 258 Regs. §1.1014-6(b)(2).
Example—Adjustments Before Death
D transfers depreciable property to A for life, remainder to S. D's adjusted basis of
$10,000 is shared by the donees under the gift uniform basis rules (discussed in
¶1430.02.E, below). Assume that A's share at the time of the gift is $7,000 and S's is
$3,000. Depreciation of $2,000 is claimed by S before D dies. At D's death the property
has a fair market value of $22,000. At that time, the uniform basis is shared by A and S
in a 2/3 to 1/3 ratio. The uniform basis is $22,000. The adjusted uniform basis is $20,000
($22,000 - $2,000). A's share is $13,333, and S's is $6,667.
If only a portion of the property is included in the decedent's gross estate, the
uniform basis is adjusted at the date of death to reflect a similar portion of what would
otherwise be the increase in the uniform basis. 259
/Footnote/ 259 Regs. §1.1014-6(b)(3)(i).
Example—Calculation (1)
Refer to the preceding example. Assume that under the estate tax law only $16,500 of the
$22,000 value of the property is included in D's gross estate. Although the uniform basis
would have increased by $10,000 had the entire property been included in D's gross estate,
only $7,500 ($10,000 x $16,500 included in estate/$22,000 fair market value) is added to
the uniform basis. The uniform basis is $16,000 ($10,000 + $7,500 - $2,000 depreciation
($16,500/$22,000)). This uniform basis is shared by A and S, $10,667 and $5,333,
respectively.
The preceding rule can be applied more directly if the portion that is included in the
decedent's gross estate reflects only one of the multiple interests in the property. 260
The uniform basis of the interest equals the basis in the interest at the moment before
death increased by the amount included in the decedent's gross estate. 261
/Footnote/ 260 Regs. §1.1014-6(b)(3)(ii).
/Footnote/ 261 Id.
Example—Calculation (2)
Refer to the preceding example. Assume that the $16,500 included in D's gross estate
reflects a valuation of the remainder interest because under the estate tax law only the
remainder is included in the gross estate. Immediately before D's death, the adjusted
uniform basis of $8,000 ($10,000 - $2,000 depreciation) is shared by A and S, $5,333 and
$2,667, respectively. S's basis in the remainder is increased by $15,000 ($16,500 - $1,500
of the depreciation), using the $16,500/$22,000 ratio. Thus, it is $17,667.
Limitations apply to the use of the uniform basis computed under the preceding rules. If
the value of the life interest is not included in the decedent's gross estate, the amount
of depreciation, depletion or amortization allowed to the life tenant is limited to no
more than and no less than the amount allowable to the life tenant had no portion of the
basis been determined under the fair market value basis rules. 262 Any increase in
depreciation, depletion or amortization resulting from the increase in the uniform
adjusted basis is not allowed to the life tenant. 263
/Footnote/ 262 Regs. §1.1014-6(b)(3)(iii)(a).
/Footnote/ 263 Regs. §1.1014-6(b)(3)(iii)(b).
g. Application to Remainders
If property is transferred for life, with remainder in fee, and the remainder holder dies
before the life tenant, no adjustment is made to the uniform basis of the property when
the owner of the remainder dies. 264 However, the basis of the remainder to the new
remainder owner is determined as follows. The portion of the adjusted uniform basis of the
property is adjusted by the difference between the value of the remainder at the date of
the original remainder owner's death and the basis of the remainder immediately preceding
that death. 265
/Footnote/ 264 Regs. §1.1014-8(a)(1).
/Footnote/ 265 Id.
Example—Remainder Interest (1)
In his will, a decedent established a trust whose corpus was stock with a fair market
value of $100,000. The trust paid its income to A for life, remainder to B and her heirs.
B died before A and bequeathed her remainder to C. At the time of B's death, the stock had
a fair market value of $160,000. Assume that, under the actuarial tables, the portion of
the uniform basis allocated to the remainder is $30,000. Assume that the value of the
remainder at B's death is $50,000. The difference between the basis and the value is
$20,000. This amount is added to the $30,000, giving C a $50,000 basis in the remainder
when B dies.
Example—Remainder Interest (2)
Refer to the preceding example. Assume that 3 years later C sells her remainder interest.
At the time of the sale, the portion of the uniform basis allocable to the remainder is
$35,000. C's basis for determining gain or loss realized from the sale is $55,000, the sum
of $35,000 plus the $20,000 difference between basis and value at the time of B's death.
At the termination of the trust or when the life tenant dies, the basis of the property is
distributed to the new holder of the remainder equals the uniform basis at the time the
life interest ends or the distribution is made, adjusted by the difference between the
value of remainder when the original remainder owner died and the portion of the uniform
basis allocated to the remainder at that time. 266
/Footnote/ 266 Regs. §1.1014-8(a)(2). See Huggett v. Burnet, 64 F.2d 705 (D.C. Cir.
1933), rev'g 24 B.T.A. 669 (1931); Slack v. Comr., 36 B.T.A. 105 (1937).
Example—Remainder Interest (3)
Refer to the preceding example. Assume that C does not sell her remainder but that A dies,
causing C to become the full owner of the property. Assuming no adjustments to basis are
required, the uniform basis is $100,000. C's basis is $120,000, the sum of the $100,000
plus the $20,000 difference between value and basis at the time of B's death.
Your basis in property you inherit is usually its FMV at the date of the decedent's death.
If a federal estate tax return has to be filed, your basis in property you inherit can be
its fair market value at the alternate valuation date if the estate qualifies and elects
to use alternate valuation. If a federal estate tax return does not have to be filed, your
basis in the property is its appraised value at the date of death for state inheritance or
transmission taxes.
Your basis in inherited property may also be figured under the special farm or closely
held business real property valuation method, if chosen for estate tax purposes. This
method is discussed later. For more information on the alternate valuation date, see
Publication 448.
Appreciated property. The above rule does not apply to appreciated property you receive
from a decedent if you or your spouse originally gave the property to the decedent within
1 year before the decedent's death. Your basis in this property is the same as the
decedent's adjusted basis in the property immediately before his or her death, rather than
its FMV. Appreciated property is any property whose FMV on the day it was given to the
decedent is more than its adjusted basis.
Community Property
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, and Wisconsin), husband and wife are each usually considered to own
half the community property. When either spouse dies, the total value of the community
property generally becomes the basis of the entire property, even the part belonging to
the surviving spouse. For this to apply, at least half the community property interest
must be includable in the decedent's gross estate, whether or not the estate must file a
return.
For example, if at least half the FMV of the community interest is includable in the
decedent's estate and the FMV of the community interest is $100,000, the basis of the
surviving spouse's half of the property is $50,000. The basis of the other half to the
decedent's heirs is also $50,000.
For more information on community property, see Publication 555, Federal Tax
Information on Community Property.
Property Held by Surviving Tenant
The following example explains the rule for the basis of property held by a surviving
tenant in a joint tenancy or tenancy by the entirety.
Example. John and Jim owned, as joint tenants, business property that they purchased
for $30,000. John furnished two-thirds of the purchase price and Jim furnished one-third.
Depreciation deductions allowed before John's death were $12,000. At the date of John's
death, the property had an FMV of $60,000, two-thirds of which is includable in John's
estate. Under local law, John and Jim as joint tenants each had a half interest in the
income from the property. Jim figures his basis in the property at the date of John's
death as follows:
Interest Jim bought with his own $10,000
funds—1/3 of $30,000 cost
Interest Jim received on John's 40,000
$50,000
death—2/3 of $60,000 fair market
value
Minus:1/2 of $12,000 depreciation
6,000
before John's death
Jim's basis at the date of John's death $44,000
If Jim had not contributed any part of the purchase price, his basis at the date of John's
death would be $54,000. This is figured by subtracting the $6,000 depreciation on the half
interest that he acquired before the date of death from the $60,000 FMV.
If, under local law, Jim had no interest in the income from the
property and if he contributed no part of the purchase price, his basis at John's death
would be $60,000. This $60,000 is the FMV of the property.
Qualified Joint Interest
Include one-half of the value of a qualified joint interest in the decedent's gross
estate. It does not matter how much each spouse contributed to the purchase price. Also,
it does not matter which spouse dies first.
A qualified joint interest is any interest in property held by
husband and wife as:
1) Tenants by the entirety, or
2) Joint tenants with right of survivorship, if husband and wife are the only joint
tenants.
Basis. As the surviving spouse, your basis in property that you owned with your spouse as
a qualified joint interest is the cost of your half of the property with some adjustments.
Decrease the cost by any deductions allowed to you for depreciation and for depletion.
Increase the reduced cost by your basis in the half you inherited. This basis is the FMV
at your spouse's date of death, or at the alternate valuation date if elected for estate
tax purposes, or the basis figured under the special farm or other closely held business
real property valuation method, if elected for estate tax purposes.