Basis of inherited property

When you acquire property from a decedent, your basis generally equals the property's fair market value on the date of death. This rule applies except as otherwise provided in section 1014. It also requires that you did not sell, exchange, or otherwise dispose of the property before the decedent's death.

Your inherited property falls within a broader category called property acquired from a decedent. That category principally includes property you acquire by bequest, devise, or inheritance. For a decedent dying after December 31, 1953, it also principally includes property required to be included in determining the decedent's gross estate under any provision of the Code of 1954 or the Code of 1939.

The general purpose of section 1014 is to give you a basis equal to the value placed on the property for federal estate tax purposes. Your basis nevertheless remains subject to the specific valuation rules, exclusions, and limits described below.

Your basis does not always use fair market value on the date of death. Section 1014(a) provides other treatments when the specified election or exclusion applies to your property.

For property subject to section 1014(a), your basis cannot exceed its final value for federal estate tax purposes when the consistency requirement applies. If no final value has been determined and you have been furnished a statement identifying the property's value under section 6035(a), your basis cannot exceed the value on that statement.

This limit applies to your property only if including it in the decedent's estate increased the estate's federal estate tax liability after allowable credits. Section 1014(f) also authorizes the Secretary to provide regulatory exceptions.

For your property, the statute recognizes several ways a final estate tax value can be established. One is a value reported on a return under section 6018 that the Secretary does not contest before the assessment period expires. Otherwise, a value specified by the Secretary becomes final if the executor does not timely contest it. A court determination or a settlement agreement with the Secretary can also establish the value.

Your section 1014(a) assets face this restriction solely when their inclusion produces additional chapter 11 tax, net of permitted credits. Once applicable, section 1014(f) sets a ceiling for your acquisition basis at the valuation finalized for estate taxation. Pending finalization, a section 6035(a) disclosure identifying your asset's valuation, if furnished, establishes the ceiling at its listed amount.

A special rule applies if you or your spouse gave appreciated property to the decedent within 1 year before death and you receive that property from the decedent. Your basis is the decedent's adjusted basis immediately before death, rather than the property's fair market value.

The statutory rule applies to a decedent dying after December 31, 1981. It covers appreciated property acquired by the decedent by gift during the 1 year period ending on the date of death when that property passes back to you as the donor or to the donor's spouse.

For this rule, your gift is appreciated property if its fair market value on the day you transferred it to the decedent exceeded its adjusted basis. The definition therefore compares those amounts on the gift date.

Similar rules apply if the decedent's estate sells the appreciated property or a trust of which the decedent was the grantor sells it. Those rules apply to the extent you, as the donor or the donor's spouse, are entitled to the sale proceeds. The property must have been acquired by the decedent by gift during the same 1 year period.

You cannot apply section 1014 to property that constitutes a right to receive income in respect of a decedent under section 691. The statute expressly excludes that property from this section.

You also cannot apply the general basis rule, or the other rules prescribed elsewhere in the cited regulation, if you sold, exchanged, or otherwise disposed of the property before the decedent's death.

Your basis can follow a different statutory system for property acquired from certain decedents who died in 2010. Section 1022 determines that basis if the executor made an election under section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

If you receive a passive activity interest because its owner dies, the owner's unused passive activity losses are deductible against the decedent's income in the year of death only to a limited extent. The losses are allowed only to the extent they exceed the increase in your basis under the rules for property acquired from a decedent.

For the passive activity interest you inherit, the basis increase reduces the decedent's deductible unused losses in the year of death. If your basis increase equals or exceeds those losses, none of them is deductible against the decedent's income for that year.

If you acquire property by gift after December 31, 1920, the starting basis rule generally carries over the donor's basis. If the donor acquired the property by gift, the statute refers to the last preceding owner who did not acquire it by gift.

Your basis for determining a loss has a separate limit. If the donor's basis, adjusted for the period before the gift under section 1016, exceeds the property's fair market value when you receive the gift, your basis for determining loss is that fair market value.

If you do not know the facts needed to determine the donor's or last preceding owner's basis, the statute directs the Secretary to obtain them if possible. The Secretary may obtain them from the donor, that owner, or another person who knows them.

If obtaining those facts is impossible, the statute uses the property's fair market value as found by the Secretary when the donor or relevant owner acquired it. The Secretary uses the actual or approximate acquisition date according to the best information obtainable to determine that prior owner's basis for your gift.

If you acquired property by gift on or after September 2, 1958, section 1015(d) provides an increase to the basis determined under subsection (a) for gift tax paid. That increase cannot raise your basis above the property's fair market value at the time of the gift. For gifts made after December 31, 1976, the special calculation below governs the increase.

For a gift made after December 31, 1976, your increase equals the gift tax paid multiplied by the ratio of the gift's net appreciation to the amount of the gift. The increase cannot exceed the gift tax paid. Net appreciation is the amount by which the gift's fair market value exceeds the donor's adjusted basis immediately before the gift.

To determine the gift tax attributable to your gift, the statute allocates the donor's total gift tax for the calendar year or preceding calendar period. It multiplies that tax by the ratio of your gift's amount to the donor's taxable gifts for that year or period. Taxable gifts are defined under section 2503(a), computed without the deduction allowed by section 2521.

For that allocation, your gift's amount is the amount included in total gifts under section 2503(a), reduced by any deduction allowed for that gift under section 2522 or section 2523. If the donor and spouse elected under section 2513 to treat the gift as made equally by each, the attributable tax is the sum of the tax allocated to each half.

If you acquired the gift before September 2, 1958, and had not disposed of it before that date, your basis increases on that date by the attributable gift tax. Calculate your maximum adjustment by subtracting the donor's contemporaneous basis from gift date fair market value.

For purposes of section 1016(b), your increase under section 1015(d)(1) is treated as an adjustment under section 1016(a). For property you acquired by gift before 1955, the statutory references mean the corresponding provisions of the Internal Revenue Code of 1939 or prior revenue laws effective for the gift year.