523. How is the tax basis of property acquired from a decedent determined?polearyrcline202005-04-08T18:45:00Z2014-07-25T17:18:00Z2014-07-25T17:18:00Z27414226Hewlett-Packard Company3594958142007-10-05T00:00:00ZTaxFactsDefaultArticleSite Map/Life Insurance/Income Taxation/Proceeds/Living/Disposition/Sale or Purchase of a Contract115140262-00-tf1.xml263.00;#2099;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1If the owner of a life insurance or endowment contract sells the contract, such as in a life settlement, what are the income tax consequences to the seller?74200.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:41:49Z523. How is the tax basis of property acquired from a decedent determined?General RulesStepped up basis. As a general rule, the basis of property that has been acquired from a decedent is the fair market value of the property at the date of the decedent’s death (i.e., the basis is “stepped up” or “stepped down,” as the case may be, to the fair market value). This rule applies generally to all property includable in the decedent’s gross estate for federal estate tax purposes (whether or not an estate tax return is required to be filed). It applies also to the survivor’s one-half of community property where at least one-half of the value of the property was included in the decedent’s gross estate. As an exception, however, the rule does not apply to “income in respect of a decedent” (see Q 550); normally the basis of such income is zero.IRC Sec. 1014(c). As another exception, the rule does not apply to appreciated property acquired by the decedent by gift within one year of his death where the one receiving the property from the decedent is the donor or the donor’s spouse; in such case the basis of the property in the hands of the donor (or spouse) is the adjusted basis of the property in the hands of the decedent immediately before his death.IRC Sec. 1014(e). If an estate tax return is filed and the executor elects the alternative valuation (see Q 662), the basis is the fair market value on the alternative valuation date instead of its value on the date of death.IRC Sec. 1014(a).If property in the estate of a decedent is transferred to an heir, legatee, devisee, or beneficiary in a transaction that constitutes a sale or exchange, the basis of the property in the hands of the heir, legatee, devisee, or beneficiary is the fair market value on the date of the transfer (not on the date of decedent’s death). Likewise, the executor or administrator of the estate will recognize a gain or loss on the transaction. For example, if the executor of the will, to satisfy a bequest of $10,000, transfers to the heir stock worth $10,000, which had a value of $9,000 on the decedent’s date of death, the estate recognizes a $1,000 gain, and the basis of the stock to the heir is $10,000.Treas. Reg. §1.1014-4(a)(3).Jointly held property. Note that the “stepped up” basis rule applies only to property includable in the decedent’s gross estate for federal estate tax purposes.IRC Sec. 1014(b)(9). Thus, one acquiring property from a decedent who held the property jointly with another (or others) under the general rule of estate tax includability (i.e., the entire value of the property is includable in the estate of the first joint owner to die except to the extent the surviving joint owner(s) can prove contribution to the cost–see Q 589) receives a stepped up basis in the property in accordance with that rule. By contrast, one who acquires property from a decedent spouse who, with the surviving spouse, had a qualified joint interest in the property (see Q 589) receives a stepped up basis equal to one-half the value of that interest.Community property. The stepped up basis rule applies in the case of community property both to the decedent’s one-half interest and to the surviving spouse’s one-half interest.IRC Sec. 1014(b)(6).Qualified terminable interest property. Upon the death of the donee spouse or surviving spouse, qualified terminable interest property (see Q 610) is considered as “acquired from or to have passed from the decedent” for purposes of receiving a new basis at death.IRC Sec. 1014(b)(10).Decedents Dying in 2010 Who Elected Not To Be Subject to Estate TaxModified carryover basis. For decedents dying in 2010 who elected not to be subject to estate tax, a modified carryover basis regime (with limited step-up in basis) replaces the step-up in basis for property acquired from a decedent. That is, the basis of the person acquiring property from a decedent making the election in 2010 will generally be equal to the lesser of (1) the adjusted basis of the decedent (i.e., carried over to the recipient from the decedent), or (2) the fair market value of the property at the date of the decedent’s death. However, step-up in basis is retained for up to $1,300,000 of property acquired from a decedent. In the case of certain transfers to a spouse, step-up in basis will be available for an additional $3,000,000 of property acquired from a decedent. In the case of a decedent nonresident who is not a United States citizen, step-up in basis will be available for only $60,000 of property acquired from the decedent.IRC Secs. 1014(f), 1022 (for decedents dying in 2010 only).