Law Office of John S. Palmer Attorney at Law

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Closing a Tax Loophole

Posted Saturday, March 5, 2016 by John S. Palmer

Last July the US tax code was amended to prevent taxpayers from claiming a tax basis in inherited property that is different than the value established by the decedent’s estate tax return. The “tax basis” of property is important because the profit, or taxable gain, from selling property is based on the difference between the sale price and the tax basis. Normally the purchase price is used to establish the tax basis (with adjustments for costs of sale), but for inherited property the value of the property on the date of the decedent’s death is used to establish the tax basis of the new owner(s).

In some cases, taxpayers successfully argued that their tax basis in inherited property was different than the value stated in the decedent’s estate tax return. To prevent this, the law enacted last year states that the tax basis of inherited property is “the fair market value of the property at the date of the decedent’s death” and shall not exceed the value as established for estate tax purposes. However, this only applies if inclusion of the property in the decedent’s estate actually increased the estate’s tax liability; it does not apply if a tax return was filed but no tax is owed, or cases where the property qualifies for the charitable or marital deduction.

In cases where the new law applies, those who inherit property must be provided with a statement by the party filing the estate tax return (usually the executor) “identifying the value of each interest in such property as reported on such return and such other information with respect to such interest as the [IRS] may prescribe.” The statement must also be filed with the IRS by the earlier of the date the estate tax return is due or the date it is actually filed. A new accuracy-related penalty is imposed for taxpayers who subsequently claim a different tax basis in the property.

Last month, the IRS announced that statements due prior to March 31, 2016 may be filed on March 31st so that the party responsible for filing the statement has time to review proposed regulations.

Yesterday, the proposed regulations were published in the Federal Register. They apply to property acquired from a decedent if the due date for the estate tax return was after July 31, 2015.

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Law Office of John S. Palmer11911 NE 1st St, Ste. B204,Bellevue, WA 98005-3056