Basis of Property Gifts and Inheritance

For those having received property by gift or inheritance

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Question or Topic

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The Question: What is the basis to use for property that is received by gift (during the donor's lifetime) or received by inheritance?

Objectives

Determine the basis and if or when the property is sold compute the gain or loss under the appropriate tax rules.

Property - Proof of Cost

Property Basis - Acquired by Gifts

Property Basis - Acquired by Inheritance

Property Basis - Recvd by Inheritance 2

Property - Sale of - Gain or Loss

	The Answer

Recently, I ran across a very interesting case. This was one of my clients I had worked for for a very long time. As with most of the firm's clients the family members were both friends and clients. The husband had a very good job with a manufacturing company and the wife had quit a very lucrative job to be at home with their daughter. The following are the circumstance and how I found a loop hole to help the client turn a $23,000 capital gain into tax-free income.

An aunt transferred to the husband a home. The transfer was made during the lifetime of the aunt. The aunt had received the home as a gift (not an inheritance) from the husband's grandmother. The last acquisition other than a gift during the lifetime of the donor was in 1950. Since the basis dated back to 1980 the client was staring at a large capital gain on the sale of the property. However, the full story is not yet complete. The series of the events subsequent to the transfer in November might appear at first glance to work against the client.

§1.1015-1

(c) TIME OF ACQUISITION. The date that the donee acquires an interest in property by gift is when the donor relinquishes dominion over the property and not necessarily when title to the property is acquired by the donee. Thus, the date that the donee acquires an interest in property by gift where he is a successor in interest, such as in the case of a remainderman of a life estate or a beneficiary of the distribution of the corpus of a trust, is the date such interests are created by the donor and not the date the property is actually acquired.

Here is a brief summary of the events starting with the gift to the client:

November year 1 - aunt gives the home to the client
May year 2 - aunt passes on
November year 2 - home is sold

The client is in a predicament which at first appears to remove the possibility of using the stepped up basis in the inherited property rules. The trap is that for property received by gift the donor's basis must be used. This particular situation would mandate using the 1950 basis to compute any gain on the sale of the property. What is unfortunate from the income tax point of view is had the home been transferred by the estate instead of by the aunt during her life, the stepped up basis rules would be used and the client would no income tax on the sale. In response to the needs of the client I embarked on a research journey to discover if any tax rules might exist to alleviate the seemingly unfortunate tax situation.

Fortunately the following tax rule was located:

§1.1015-1

(d) PROPERTY ACQUIRED BY GIFT FROM A DECEDENT DYING AFTER DECEMBER 31, 1953. If an interest in property was acquired by the taxpayer by gift from a donor dying after December 31, 1953, under conditions which required the inclusion of the property in the donor's gross estate for estate tax purposes, and the property had not been sold, exchanged, or otherwise disposed of by the taxpayer before the donor's death, see the rules prescribed in section 1014 and the regulations thereunder.

This looks promising and to affirm the impact of the rule I referred to §1014 as mentioned in the rule:

SECTION 1014. BASIS OF PROPERTY ACQUIRED FROM A DECEDENT

(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--

(1) the fair market value of the property at the date of the decedent's death,

(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,

(3) in the case of an election under section 2032A, its value determined under such section, or

(4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.

In other words - I was on a track to bring the stepped up basis back into the ball game!

Here is how it works -

	Solutions

Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another.

Kit to Prepare for Your Adviser