What is the “Basis” of this IRS Notice?
The Internal Revenue Service (‘IRS”) does not often provide guidance for new legislation promptly. Recently, however, the IRS responded quickly to a new law and and effective dates.
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “ACT”) (I know.. I also asked myself what does this have to do with tax?) (P.L. 114-41), effective July 31, 2015, applies to any estate tax return required to be filed after July 31, 2015. The IRS now requires that the income tax basis of an asset reported for income tax purposes by a beneficiary can NOT exceed the value of the asset as determined and reported on a decedent’s federal estate tax return. Further, new Section 6035 of the Internal Revenue Code will require the executor to report such basis information to the IRS and to each person having a beneficial interest in that property no later than 30 days after the date the estate tax return is required to be filed of, if earlier, 30 days after the date when the return is actually filed.
For example, for estate tax purposes, the basis (the fair market value at the date of death) of a house may be $500,000. When a beneficiary inherits that house, then their basis should also be $500,000 (assuming no improvements, etc.) Some taxpayers would not report a basis of $500,000 but, for example would report a basis of $750,000. When the taxpayer sold the house for $1,000,000 they reported a gain of $250,000 ($1,000,000 less $750,000) instead of $500,000 ($1,000,000 less $500,000). This law allows the IRS to keep track of such basis.
Further, the executor MUST notify the IRS AND beneficiaries of the basis as reported on the estate tax return. Penalties are incurred if such information is not provided.
As the effective date was July 31, 2015, this date put many preparers on short notices to file such reports. Notice 2015-57 (the “Notice”) provides that any information required to be filed with the IRS prior to February 29, 2016 is delayed to February 29, 2016.
Note that this basis consistency requirement is NOT required for assets that do NOT increase the estate tax liability. Further, because this law only applies if estate tax returns are required and there is an estate tax to pay, then this law does not appear to apply to returns that are filed only to elect portability. However, even though this law would not require basis consistency on those returns, there is a still a judicial doctrine of consistency which should apply. Bottom line: if you sell an asset that you have inherited, then use the value of such asset, as valued on the date of the decedent’s death, as your basis.
ADVICE: If your tax preparer is currently preparing a federal estate tax return carefully review the Act and the Notice to see how it applies to your situation. If the statements are not properly sent out within the proper time frame, then the penalties can be severe.
New Word of the Week: Basis (also can be called cost basis) is a tax term which is generally the value given to an investment in property. It is generally the taxpayer’s cost and is used to calculate gain or loss. As discussed above the basis can also be determined if you inherit property from a decedent. This basis can be adjusted upward and downward depending on depreciation, improvements, etc.
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