11.3 Inherited Basis under §1014

11.3 Inherited Basis under §1014

REG Area III, Group A’s remaining gift-or-inheritance task is to calculate the tax basis of property received as an inheritance from a decedent. IRC §1014 is a different statute from §1015. The heir does not carry over the decedent’s historic cost. The heir generally takes fair market value at the date of death. That FMV can be higher than the decedent’s basis (step-up) or lower (step-down). Both directions are the rule. Appreciated stock is wiped clean of the decedent’s unrealized gain. Depreciated stock is wiped clean of the decedent’s unrealized loss. Estates sometimes sell loss property before death for that reason; REG will not give the heir a loss the decedent failed to take.

Date-of-death FMV — the default

Unless an alternate-valuation election is in effect, basis of property acquired from a decedent is its FMV on the date of death. For a publicly traded stock, that is the mean of the high and low on that date (or the estate-tax valuation actually used). For a building or closely held interest, it is the appraised date-of-death value that would be used for estate-tax purposes. The decedent’s $20,000 cost is a historical fact. It is not the heir’s basis.

Worked inheritance. Decedent’s basis in stock $20,000. FMV at death $80,000. Heir sells for $90,000. Recognized gain is $10,000 — the post-death appreciation only. Character is long-term capital gain, even if the heir sells the next week. Contrast a lifetime gift of the same stock while FMV is $80,000 and the donor’s basis is $20,000: the donee who later sells for $90,000 has $70,000 of gain under §1015 carryover. Same asset, same $90,000 sale, $60,000 more gain if the transfer was a gift rather than a bequest. That contrast is the Blueprint skill.

The step-down is the neglected twin. Decedent’s basis $80,000, FMV at death $50,000, heir sells for $48,000: the heir’s loss is $2,000, not $32,000. Section 1014 is not a one-way taxpayer benefit.

Alternate valuation date — IRC §2032

The executor may elect to value estate property as of the alternate valuation date, which is six months after the date of death. Two limits keep this from being an income-tax planning toy:

1. The election is allowed only if it decreases the value of the gross estate and the amount of estate tax imposed. If values rose, or if no estate tax would be due either way, the election is not available merely to hand heirs a higher (or lower) income-tax basis.
2. Property sold, distributed, or otherwise disposed of during the six-month period is valued as of that disposition date, not at the six-month mark. The executor cannot cherry-pick assets. The election, if made, applies to the estate’s property as a whole.

When the election is valid, the heir’s §1014 basis follows the alternate value, not the date-of-death value. The estate-tax exemption itself is inflation-indexed; REG will not ask you to recite the current exemption as a memorized dollar. It will ask whether AVD is available on the facts — did values fall, and is there estate tax to reduce?

Holding period is automatically long-term

IRC §1223 treats a person who takes a §1014 basis in property acquired from a decedent as having held that property for more than one year if it is sold within a year of death. Combined with the normal more-than-one-year rule after that first year, the exam statement is simple: inherited property with a §1014 basis is automatically long-term. The decedent’s holding period does not matter. The heir’s calendar does not matter. Monday death, Tuesday sale, long-term capital gain or loss on the post-death move.

That automatic long-term result is not the gift rule. Do not tack, and do not start a new short-term clock, on a §1014 asset. Capital-gain classification of the $10,000 in the worked example is long-term because of this statute, taught again with gifts and virtual currency in /study-guides/cpa-reg/gross-income/capital-gains.

IRD — no basis step-up

IRC §1014(c) carves out income in respect of a decedent (IRD) under §691. IRD is a right to income the decedent had already earned, or was entitled to, that was not properly includible on the decedent’s final income-tax return. Typical REG facts:

• Unpaid wages or deferred compensation paid to the estate or heir after death
• Accrued but unpaid interest, and declared but unpaid dividends
• The remaining taxable balance of a traditional IRA or qualified plan that will be included in income when distributed
• The unrecognized gain in an installment note the decedent was collecting

Those rights do not take a FMV basis under §1014. The successor includes the income when received, with the same character the decedent would have had. Collecting $12,000 of unpaid wages is $12,000 of ordinary compensation income to the heir (or estate), not a tax-free collection against a stepped-up basis. A traditional IRA is not a brokerage account of stepped-up stock; the income tax remains to be paid as amounts come out. An estate-tax deduction for estate tax attributable to IRD can exist under §691(c); REG will not ask you to compute that deduction from an indexed exemption. It will ask you not to step up the IRD item.

Appreciated stock in a taxable brokerage account is not IRD. That stock does take FMV under §1014. Read the asset, not the word “inherited.”

The one-year deathbed-gift rule — IRC §1014(e)

Section 1014(e) stops a round-trip. If a donor gives the decedent appreciated property, the decedent dies within one year of the gift, and the property passes back from the decedent to the donor (or to the donor’s spouse), the returning owner does not take FMV. Basis is the decedent’s adjusted basis immediately before death — which, under §1015, was the donor’s own carryover. The deathbed gift to a dying relative, followed by a bequest home, does not manufacture a step-up.

Worked §1014(e). Parent’s basis in stock $10,000, FMV $50,000. Parent gifts the stock to a dying child. Child dies four months later and the will returns the stock to parent. Parent’s basis remains $10,000, not $50,000. If the child had lived more than one year after the gift, or if the stock had passed to someone other than the donor or the donor’s spouse, §1014(e) would not apply and date-of-death FMV would.

The property must have been appreciated at the gift. A deathbed gift of loss property is not the §1014(e) target; the ordinary §1014 step-down would have reduced basis anyway.

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