This course examines the U.S. federal tax system as it relates to property transactions of business owners and shareholders. Topics include cost recovery, such as depreciation, amortization, and depletion; calculation of realized versus recognized gains and losses; evaluation of the potential tax effects of nontaxable exchanges; and the combining, or netting, gains and losses that are different in nature. Assignments facilitate self-discovery of knowledge and development of a variety of professional skills.
Adjusted Basis: Inheritance Basis
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來自 University of Illinois at Urbana-Champaign 的課程
Federal Taxation II: Property Transactions of Business Owners and Shareholders
19 個評分
從本節課中
Module 4 Property Transactions: Gains, Losses, and Adjusted Basis
In this module, you will take a deep dive into property transactions, specifically disposals, and their tax consequences under U.S. federal tax law. First, we’ll begin by discussing the economic concept of amount realized. Next, we’ll discuss differences between the amount and gains or losses realized versus recognized, such as deferred or postponed gains and disallowed losses. Last, we’ll discuss the three main ways property basis is established, namely cost basis, gift basis, and inheritance basis.
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Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
College of Business: Department of Accountancy
Welcome back. In this video,
we will continue looking at adjusted basis.
Recall that adjusted basis is calculated as
the original basis minus accumulated cost recovery.
For example, accumulated depreciation plus capital additions.
And we need to know how to calculate
adjusted basis in order to compare to the amount realized upon
the sale disposition or exchange of
an asset so that we can figure out a realized gain or loss.
Now, the original basis that we start with depends
on how the property was originally acquired.
In the previous videos,
we looked at if property was purchased.
If property was purchased,
then we use the cost basis.
If the property was acquired because of a donor's gift,
then we use either the gain basis or the loss basis.
In this video, I look at a situation where
a taxpayer received property through an inheritance,
that is from someone who passed away.
If property was received as an inheritance,
then the basis to the recipient is
the fair market value on the date of the decedent's death.
This is known as the primary valuation date.
If the asset has appreciated in value,
then this is known as a step up in basis because the recipient now has a higher basis,
the fair market value, than what the basis was to the decedent when he or she died.
So what happens here is that the new owner,
the recipient of the property,
will not pay any tax on the appreciation while the decedent held the property.
That is essentially tax-free appreciation.
In another nice feature,
the holding period here to the recipient is, actually,
automatically long-term even if
the recipient only held the asset for one day or three months or 10 months.
If it's inherited property,
it's considered long-term property, and thus,
if it produced a long-term capital gain,
it will be subject to preferential tax rates.
Finally, the taxpayer can pick an alternate valuation date which would
use the fair market value six months after the date of the decedent's death.
However, there are many rules here,
one of which is that the fair market value actually must have gone
down between the primary valuation date and this alternate valuation date.
So if we're talking about appreciated property,
the step up in basis would be smaller on
the alternate valuation date than the step up would
be available on the primary valuation date.
One area of importance around inheritances
is that there can be some smart tax planning going on here.
Generally speaking, if a taxpayer has
appreciated property and he or she wants to give it to you,
from a strictly tax perspective,
it is better if the person simply holds onto
that property and gives it to you after they die.
That way, you get the step up in
basis so that if you were to ever sell the property later,
you have a higher basis against which to compare the amount realized.
This will make any realized gain as small as possible.
If, instead, the taxpayer had gifted you the property and then you sold it, well,
if it was appreciated properly,
then from the previous video,
we saw that we would use the gain basis or the donor's adjusted basis as our basis.
That is, there would be carryover basis,
not a step up in basis.
And thus, all of that appreciation that was earned on
the asset by both the donor and you,
the recipient, would be subject to tax.
Again, from a strictly tax perspective,
it would be smarter to obtain appreciated property through
an inheritance than through a gift because of the generous step up basis provision.
So, this small tax planning tip brings me to deathbed gifts.
Some savvy, perhaps insensitive,
taxpayers might use elderly or dying family members as
a vehicle to ensure a quick step up in basis on their own property.
So how do they do this?
Well, let's say I have appreciated property,
and they know that my great grandfather is very ill.
If I gave my great grandfather my appreciated property, then when he dies,
he bequests it back to me through an inheritance, then technically,
I've just engineered a step up in basis because I received property from a decedent.
Heck, what I should really do is give my great grandfather
all of my appreciated property so that once he passes away,
he can bequest it all back to me and voila,
I have a stepped up basis in all my appreciated assets and thus,
will never have to pay tax on that part of
the appreciation even though I actually held it while it appreciated.
Well, as you can imagine,
the IRS doesn't like the scheme.
Therefore, the IRS will not allow a step up in basis if you round trip
your appreciated assets through people that
will just bequest that back to you when they die.
More formally, the rule says that if a decedent received appreciated property as
a gift during a one-year period ending on the date of the decedent's death,
that is within one year of the person dying,
and the property is acquired or received by the decedent from a donor or
donor spouse who expects to inherit the property back from the decedent,
then the IRS says the property will have a carry over basis and not a stepped up basis.
That is, the basis will carry over from
you to the decedent and back to you with no step up.
So, sorry, no loophole here.
Well, at least not within one year of a person's death.
More than one year, well,
it actually might be possible.
Let's look at a quick example.
Doris, who was terminally ill,
received a gift of land from her son, Steve,
on September 1, 20x1,
when the fair market value of the land was $10,000.
Steve had purchased the land 10 years ago for $6,000.
Doris died on December 15,
20x1 and bequeathed the land,
which was then worth $11,000, back to Steve.
In the first question,
what is Doris's basis for the land on September 1, 20x1?
That is, what is Doris's basis for the land on the date that Steve gifted her the land?
Well, since it was a gift,
then we can assume Doris's adjusted basis is the donor's adjusted basis
or Steve's basis carried over to Doris or $6,000.
So, here, no change in basis because it was a gift from Steve to Doris.
Now, under the general rule for inherited property,
what would Steve's basis have been on December 1,
20x1 when Doris bequeathed the land to him upon her death,
assuming Steve did not originally give her the land before she died?
Again, this is under the general rule,
what happens to basis when Doris bequeaths property to Steve,
again, assuming Steve never owned that land in the first place?
Well, under the general rule,
Steve would have received a step up in basis to $11,000.
That is, his basis would be the fair market value on the date of Doris's death.
Now, under this one-year exception under deathbed gifts, what is,
in fact, Steve's basis on December 15,20x1 using our original fact pattern?
That is, assuming he gifted Doris land, she died,
and then she bequeathed it back to him,
would he have a step up in basis or just a carry over in basis?
Here, because he gifted Doris his land and within one year of the gift,
she bequeathed it back to him upon her death,
he does not receive a step up in basis.
The basis that carried over to Doris upon
gifting carries right back to him upon Doris's death.
So his basis of $6,000 remains the same as before he gifted the land to Doris.
Finally, a little bit of a twist.
What if Doris made a capital improvement to the property of
$2,000 after its receipt from Steve but prior to her death?
What would Steve's basis be on December 15th,
20x1 when he received the land back from Doris?
Well, like before, under the one-year exception,
the $6,000 basis in the land he gave to Doris would carry right back.
However, because Doris made capital improvements independent of Steve,
she does add the $2,000 in the capital improvements to the basis.
Recall that the formula for adjusted basis equals
original basis minus accumulated cost recovery plus capital additions.
This is a capital addition.
So, technically here, Steve's basis would be $8,000 or the $6,000 carried over
plus the $2,000 in capital additions that Doris made while she held the lands.
In summary, the key point with property obtained through
an inheritance is that if the property is appreciated,
the recipient will receive a step up in basis up to
the fair market value on the date of the decedent's death.
The basis is not carry over as it would otherwise be,
best case scenario, in the gift basis scenario.
There's certainly some tax planning to be done using the step up in basis provision,
but the one-year exception limits,
at least the most obvious schemes to quickly engineer a step up in basis by
round-tripping appreciated assets through
any near-death relatives or acquaintances
and getting those assets back once they pass away.
