New “Consistent Basis” Rule for Estate Assets

January 12, 2016

What Taxpayers Need to Know About the New “Consistent Basis” Rule for Estate Assets

With recent legislation, there is a new tax basis filing requirement in certain estate asset situations. So, how do you know if this new requirement applies to your situation? Check out our recent Q&A with Aprio Tax Team member Richard Lee below.

Q: Let’s assume that a beneficiary has inherited a hard-to-value real estate partnership interest, reported for Federal estate tax purposes at $50,000. Shortly after the estate tax return was filed, the beneficiary sold the interest for $100,000. What tax basis should the beneficiary use when reporting the sale for income tax purposes $50,000 or $100,000?

A: The answer is twofold. Generally, an appreciated asset held at death is “stepped-up” in basis. Using the foregoing example, if the pre-death cost basis of the partnership interest was less than $50,000, upon the decedent’s death the interest would get a basis step-up to its then fair market value.

So what is the number: $50,000 or $100,000? For a hard-to-value asset, for estate tax purposes there is an incentive to use a lower value, whereas, for income tax purposes, using a higher value (within the range of reasonable values) may be preferred.

Due to inconsistent basis reporting by taxpayers, the IRS enacted this new legislation to curb perceived abuses.

New laws now typically require consistent reporting of basis for estate and income tax purposes. Moving forward, an estate’s executor must file a statement with the IRS and each person acquiring property from the decedent, which clearly identifies the value of each property interest included in the decedent’s gross estate.

If the gross estate exceeds the Federal basic exclusion amount of $5.43 million for 2015, or $5.45 million for 2016, those filing are required to complete Form 8971, that is still in draft form.

Form 8971 should be filed within 30 days of filing the estate tax return. Since the form’s final version is unavailable, its earliest due date is February 29, 2016, for estate tax returns filed after July 2015.

Q: So, what is the basis of the foregoing partnership interest for income tax purposes?

A: If Form 8971 is required, and if inclusion of the property in the estate increases the estate tax liability, the basis would be $50,000; using a higher basis would expose the beneficiary to a 20% accuracy-related penalty.

If Form 8971 is not required, the beneficiary may argue for a stepped-up basis greater than the estate tax value, depending on the facts and circumstances. A sale reasonably close in time to the date of death may be prima facie evidence of the value of a hard-to-value asset, which, in the foregoing example, would suggest a basis for income tax purposes of $100,000.

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