Basis Of Inherited Property

By Author: lesileena
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The basis of inherited property is usually its fair market value at the time of the donor's death. There are three exceptions to this rule.

1. If a federal estate tax return is required and if the property must be included in the decedent's gross estate, the basis may be the special-use valuation if special-use valuation is elected.

2. If a federal real estate brokerage firms tax return is required and if the property must be included in the decedent's gross estate, the basis may be the fair market value on the alternate valuation date if alternate valuation is elected. Special-use and alternate valuation are permitted only under special circumstances. For more information see NebFact 93-145, Special Use and Alternate Valuation of Estates.

3. When an heir, or an heir's spouse, gifted the property inherited to a person who dies within one year of the gift the basis of the inherited property is the deceased person's basis immediately before death rather than its fair market value. This is the same as the original owner's basis prior to the original gift. ...
... This rule came into effect in 1981 to prevent individuals from gaining the benefit of basis stepped up to fair market value by a temporary transfer of property to elderly persons.

For example, Betty Jones owns 160 acres of unimproved farm real estate with an adjusted basis of $40,000 and fair market value of $200,000. She intends to transfer the property to her son, Bill, either as a gift or through her estate after her death.

If Betty transfers the property by gift now to Bill, his basis in the property would be $40,000 (donor's basis). Note that no gift tax would be paid but a reduction in Betty's unified gift and inheritance tax credit would occur. See NebFact 93-143, Federal Estate and Gift Taxes.

If Betty elects to transfer the property through her estate, Bill's basis would likely be the fair market value at the time of Betty's death ($200,000 if Betty were to die today).

Property held by a surviving joint tenant is also figured differently. If the surviving co-owner of an asset is a spouse, the basis is the cost of the survivor's half of the property adjusted for increases or decreases due to capital investment or depreciation, plus the fair market value of the deceased spouse's half at the time of their death. If an alternate valuation date is elected, fair market value of the deceased spouse's half of the alternate valuation date is used in determining basis.

When unmarried persons hold property as joint tenants and one dies, the surviving joint tenant's basis is the survivor's original contribution to the cost of the property plus the fair market value of the deceased co-owner's share. This rule applies even if income from the property is shared in a way different from the sharing of ownership.