Carryover Basis - What You Need to Know
What is carryover basis? It is a method for determining the tax basis of an asset when it is transferred from one individual to another. Carryover basis in 2010 is used when transferring property to future heirs. It determines the value of the property, and that value is used to determine the capital gains tax that must be paid when the asset is sold.
If a person died before January 01 of 2010, the basis of their assets, in the hands of their heirs, was usually the fair market value (FMV) at the date of death. Beginning in 2010 and only in 2010, the basis of assets in the hands of the heirs is the lesser of
1) the same basis as the person who has died or
2) the FMV at the date of death.
For example, if Joe dies owning IBM stock when the FMV at his date of death is $25,000 and he purchased those shares for $20,000, the basis in the hand of Joe's heirs would be $20,000. This valuation is to the disadvantage of Joe's heirs because - should they choose to sell the asset immediately -- they would pay tax on the $5,000 gain. The higher the basis value to them now, the less capital gains tax they will pay down the road (assuming the stock increased in value). There are however, additions that can be applied to the decedent's basis to raise the value to the date of death FMV. (Note: the basis for any asset, under the carryover basis rules, can never be greater than the FMV at the date of death.) The allocation of the basis additions is made by the estate's personal representative. The personal representative is also responsible for filing a form with the IRS describing the assets, who received the assets and the allocation of basis additions.
What you need to know is that there are reporting requirements associated with carryover basis and that complying with those requirements is complex and time consuming. Berntson Porter can help.
For more information, please contact Gary Holcomb, Director of Fiduciary Services at firstname.lastname@example.org or 425-289-7636.