Property acquired from a decedent who died in 2010
will NO longer have an automatic increase in basis.




Basis of Property
Basis is the amount of your investment in property for tax purposes.
The basis of property you buy is usually it's cost.  Your original basis
in property is adjusted (increased or decreased) by certain events.  If
you make improvements to the property, increase your basis.  If you take
deductions for depreciation, reduce your basis.

You cannot determine your basis in some assets by cost.  This includes
property you receive as a gift or inheritance.

IRC Section 1014
Under 1014, the general rule applied to property a beneficiary receives from
a benefactor is that the beneficiary's basis equals the fair market value (FMV)
of the property at the time the descedent dies.

For example, say someone purchases a home for $50,000.  Their basis is
equal to the cost, $50,000 (assuming no adjustments).  On the day that person
dies, the fair market value of the home is $300,000.  If the person who owns the
home bequeaths the home to a beneficiary, the beneficiary's basis will be the
fair market value of $300,000.  In contrast, if the beneficiary had given the home
to the beneficiary BEFORE their death, the beneficiary would receive a carryover
basis, which would have been the original cost of the home, $50,000

Section 1022 Election
The executor of an estate of a decedent who died in 2010 can elect to
apply modified carryover basis treatment to property acquired from the
decedent under section 301(c) of the Tax Relief, Unemployment Insurance
Reauthorization, and Job Creation Act of 2010 (TRUIRJCA). 

If the election is made, the estate will not be subject to federal estate tax.
Section 1022 applies to determine the recipients basis in most (but not all)
property acquired from the decedent.

Effect of the Section 1022 Election
If the executor makes the section 1022 Election, special rules apply:

There is no estate tax. The basis of property acquired from a decedent generally is determined under the modified carryover basis rules of section 1022 and not under section 1014.  Generally, the recipient's basis is the lesser of the decedent's adjusted basis or the fair market value (FMV) at the date of the decedent's death.

Property Basis Increase

Aggregate Basis Increase - The increase under section 1022 is $1,300,000.  However, for a decedent who was neither a resident nor citizen of the United States, the increase is $60,000. Spousal Property Basis Increase - The increase under section 1022 for a spouse is $3,000,000 only to a qualified spousal property that was both acquired from and owned by the decedent.

Note that this amount is a basis adjustment, NOT increase to fair market value
in estate assets.

NOTE:  If a decedent has an estate value of $2,000,000 with a basis of
$500,000 the estates basis in the heirs hands will be $1,800,000 ($500,000 basis +
$1,300,000 Section 1022 Basis Increase).  It will NOT be $1,300,000 ( $2,000,000 estate
value - $1,300,000 Section 1022 Basis Increase).

Example:  Laird, a single man who owns property worth $2.5 million dies in 2010, His
basis in the property is $200,000.  Lairds estate plan leaves everything to his daughter
Mikenzie.  Under Section 1022, Mikenzie will receive Laird's property with a basis of
$1.5 million ($200,000 basis + $1,300,000 Aggregate Basis Increase), not $2 million.

When Mikenzie sells the property she will pay capital gain tax on the difference between
the selling price and $1.5 million.  For 2010 liquidation, this will impose a $75,000
tax burden ($500,000 X 15%) on Mikenzie.  When the capital gains tax rate increases,
so will the tax burden on Mikenzie. 

 

Click here to leave inherited property tax basis from a decedent dying in 2010
and return to inherited property tax basis.