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Tax Tip of the Week | No. 450 | Tax Basis of Inherited Property March 7, 2018

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Tax Tip of the Week | March 7, 2018 | No. 450 | Tax Basis of Inherited Property

Short of selling an asset or a property at a break even, you will have a gain or a loss. This gain or loss is calculated by subtracting your tax basis in the asset from the sales price. Often, determining the amount of the sales price is not that difficult. On the other hand, calculating your tax basis may be quite complex. Your tax basis has a direct impact on your gain or loss. Therefore, arriving at an accurate amount for your tax basis is crucial.

For property inherited from an individual who died before or after 2010, your tax basis is generally one of the below:

(1) The fair market value of the property as of the date of the deceased individual’s death.

(2) The fair market value of the property on the alternate valuation date if the estate chooses to use the alternate valuation method. Several factors play in making what may be a big decision.

(3) The value under the special-use valuation method for real property used in farming or a closely held business. Election of this method may have far reaching implications.

(4) If a federal estate tax return need not be filed, the property’s appraised value at the date of death for state inheritance purposes.

Note: If you received appreciated property from the deceased individual and you or your spouse originally gave the property to that individual within one year before the individual’s death, your basis in this property is the same as the deceased individual’s adjusted basis in the property immediately before his or her death, rather than its fair market value.

Generally, if you and the deceased owned the property as joint tenants with right of survivorship, your basis in the property is determined based on (1) the proportionate amount you contributed to the original purchase price, and (2) for depreciable property, the way you were allocated income from the property.

If spouses held an interest in property as either (1) tenants by the entirety, or (2) joint tenants with right of survivorship where the spouses were the only joint tenants, then the surviving spouse’s basis in the property is the cost of the survivor’s half of the property with certain adjustments. The cost must be reduced by any deductions allowed to the surviving spouse for depreciation and depletion. The reduced cost must then be increased by the survivor’s basis in the half inherited.

If you inherited the property from an individual who died in 2010, your basis in the property depends on whether the executor of the deceased individual’s estate made a so-called Section 1022 election. If the executor did not make a Code Sec. 1022 election, your basis in the inherited property is determined under the rules described above. If the executor did make a Section 1022 election, the basis of property you acquired from the deceased individual generally is determined under modified carryover basis rules and not under the rules described above. Generally, the recipient’s basis is the lesser of the decedent’s adjusted basis or the fair market value at the date of the decedent’s death, increased by any allocation of “Basis Increase” (with certain additional adjustments).

Finally, the basis of certain property acquired from a decedent may not exceed the value of that property as finally determined for federal estate tax purposes, or if not finally determined, the value of that property as reported on Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent.

As you can see from above, there are many considerations in computing the basis of inherited property. Too often, the critical pieces of this puzzle are no longer available or require a visit to the courthouse at best to review old property and estate records. It is wise to never discard the estate paperwork of anyone from which you have inherited assets or expect to inherit assets. These may be very important to you many, many years down the road.

Thank you for all of your questions, comments and suggestions for future topics. They are all much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.


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