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Estate Planning Council of Northern Nevada--Basis Consistency Reporting

On August 15, 2018, Lakeside Tax Services attorney Ben Clement co-presented at an Estate Planning Council of Northern Nevada breakfast meeting event.

Ben addressed the topic of the importance of consistency in reporting tax basis of property transferred between large estates and beneficiary's inheriting property from those estates.

Ideally, consistency should be found in the following events: 1) Following death of a decedent, an estate is required to value all estate property at the fair market value ("FMV") at the date of death, 2) a beneficiary who receives property from the estate takes a basis in the property also at the FMV market value at the date of death. Although these amount should match, Congress became concerned that inconsistencies in these valuations were happening too frequently and were resulting in significant revenue losses in the form of lost capital gain taxes.

To remedy this problem, Congress added Section 1014 (f) and new Section 6035 to the US Code in 2015. These new laws do the following: 1) limits the beneficiary's basis in property inherited to the fair market values FMV of the property as reported in the estate tax return, and 2) requires an estate executor to furnish the IRS with a statement (Form 8971), detailing each beneficiaries interest in the estate properties, along with the appraised FMV, as well as a statement to each beneficiary (Form 8971, Schedule A) regarding the property inherited and its valuation, as reported on the estate tax return. When the beneficiary later sells the inherited property, the beneficiary must report the basis as provided on the statement or risk accuracy related penalties.    

Example: A Mother owns a home worth $100,000 at the time of her death. The executor of the estate furnishes IRS with Form 8971 and daughter who inherits the home with a 8971, Sch A. The daughter takes the inherited property and sales it for $120,000. With the Schedule A in hand, the daughter correctly reports the basis of $100,000 and recognizes a gain of $20,000. (This example assumes the Mother's estate has an estate filing requirement). 

These new tax laws may not solve all issues related to basis reporting and consistency, particularly for small estates, but do insure greater tax compliance by requiring large estates to provide greater transparency as to the value of the property it is transferering to it's beneficiaries.   

Information about the event can be found here: