Inherited Basis in 2010

Legislation enacted nearly 10 years ago repeals the estate tax for individuals dying in 2010, and then brings it back for those dying after 2010.  Although many had thought Congress would revoke the repeal for 2010, and keep the tax at 2009’s level, that has not happened yet.

Last December, the House by a vote of 225-200 approved H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” The bill made permanent the estate, gift, and generation skipping transfer (GST) tax laws in effect for 2009.  However, we are now well into 2010 and the Senate has not taken up that legislation.

For decedents dying in 2010 and later years, the House-passed legislation provides for an effective exemption amount for estate tax purposes of $3.5 million, an effective exemption amount for gift tax purposes of $1 million and a maximum estate and gift tax rate of 45%.  In addition, the house-passed bill would repeal the modified carryover basis rules that apply for purposes of determining basis in property acquired from a decedent who dies in 2010 (see overview of the computation below) and return to the step-up/step-down basis method that was in effect previously.

We have received questions related to determining the basis of property acquired from decedents dying in 2010.  Barring intervention by Congress, the step-up/step-down basis adjustment for inherited assets that was in effect for as long as most can remember does not apply to 2010.  Instead, a complicated (what else would you expect?) modified carryover basis system will apply to property acquired from decedents dying in 2010.  Thus, absent of any retroactive Congressional action, the basis of property inherited in 2010 is determined as follows:

Lesser of:
(1) the decedent’s adjusted basis, or
(2) the FMV at the date of death.

Plus:
(3) an allowable aggregate basis increase of $1,300,000 plus loss carryovers and built-in losses, and
(4) if applicable, a spousal property basis increase. 


(1) Substitute $60,000 for a non-resident alien.
(2) Tax loss carryovers that would have carried over to a subsequent tax year but for the death of the decedent.
(3) Losses from the sale of the decedent’s property if it had been sold at FMV immediately before the decedent's death, generally to the extent the loss would have been allowed as a trade or business loss.  
(4) Aggregate basis increase that is allocated among all the assets of the decedent. If the amount of the basis increase available is less than the unrealized appreciation in the assets whose bases are eligible to be increased, it will be up to the executor to determine which assets receive a basis increase. The basis of any individual asset cannot be adjusted above its fair market value.
(5) Additional basis increase that is allocated only to the surviving spouse’s “qualified spousal property”.  Note: If the spouse were the sole beneficiary, then the spouse would be entitled $4,300,000 of basis increase plus allowable carryovers and built-in losses.

Community Property – Generally applies where at least one-half of the whole community interest is included in the decedent's estate; both the decedent's and the surviving spouse's share of community property could be eligible for a basis increase.

Ownership Requirement - Where property was owned by the decedent and another person as joint tenants with right of survivorship or as tenants by the entirety, the following ownership rules will apply:

(A) if the only other person who is a joint tenant or tenant by the entirety is the surviving spouse, the decedent will be treated as the owner of only 50 percent of the property,

(B) in any case to which the rule at (A) doesn't apply and in which the decedent furnished consideration for the acquisition of the property, the decedent will be treated as the owner of the property to the extent of the portion of the property which is proportionate to that consideration, and

(C) in any case, to which the rule at (A) doesn't apply and in which the property has been acquired by gift, bequest, devise, or inheritance by the decedent and any other person as joint tenants with right of survivorship (and their interests are not otherwise specified or fixed by law), the decedent will be treated as the owner of the property to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants with right of survivorship.

Income in Respect of a Decedent Property that results in income in respect of a decedent is not covered by these rules.

This may all be overturned if Congress gets around to estate tax reform this year. But in the meantime, please give this office a call if you have questions.

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