Sometimes tax laws create a natural conflict of interest among taxpayers. Establishing property values in an estate after someone dies is an area that creates this conflict. A new tax law is now in place to address this problem. Here is what you need to know.
Estate goal: Value property as low as possible.
Estates want to value property as low as possible to lower possible estate taxes.
Beneficiary goal: Value the property at time of receipt as high as possible.
Those who inherit property want their inheritance valued as high as possible, since there is no federal inheritance tax. If property is later sold, the taxable amount is only the amount received in excess of the value of the property on the date* it was received.
The IRS’ problem: A single piece of property is often incorrectly given two values at a single moment in time. One value given by the estate and a second, higher one, by the beneficiary to help when the property is later sold.
An example of the problem. A collector of old cars passes away. The estate values a specific antique vehicle at $75,000 on the date of death. A son of the person who died inherits the car. The son sells the car for $125,000, but has an appraisal of the car that says the car’s market value is $110,000. Since the son receives a “stepped up basis” to the fair market value at the date of death*, he uses $110,000 to calculate a taxable gain of $15,000 ($125,000 sales price minus $110,000 appraisal.) As a result of this transaction the IRS receives estate taxes based on $75,000, versus $110,000. The IRS only receives capital gain taxes on a $15,000 gain versus $50,000 ($125,000 minus $75,000.)
New Reporting Requirement
The solution. Get rid of the possibility to have two different values assigned to the same piece of property at a given moment in time.
The process. IRS now requires a statement of value for assets transferred through an estate. That value must be reported to them and to the person that receives the property from the estate.
Timing. This new reporting applies to all estates filing tax returns after July 31, 2015. The statement of value must be provided to the IRS and the beneficiaries within 30 days after either the due date of the return or after filing the return, whichever is earlier.
Comments. Since the details of how to report these transactions is still being established by the IRS, any estate subject to this reporting before February 29, 2016 has until February 29, 2016 to furnish the statement.
What’s the big deal?
The reporting requirement is mainly going to impact large estates, so why should you care? The new reporting requirement impacts both estates AND those that receive benefits from an estate. You could be impacted by simply receiving a small part of someone else’s estate. If this happens, you will need to look for the new statement of value.
* stepped up basis rules define alternative ways to determine the value of property transferred by the estate.