100% step up - joint return

[Gretel]

Recently married, both of them are farmers with each owning their own farm business. One dies and spouse will get 100% step up for deceased (land was titled in both names only one month ago). I think so far we are good.

Here is what I believe will happen on the depreciation schedule: Deceased farmers assets will be reported on joint tax return as usual. Step up basis will create asset #2 for all assets that belonged to deceased and placed in service date will be DOD. Does this sound right?

[Roland Slugg]

The surviving spouse will get a 100% step-up in basis only if the property is in a community property state and was titled in both spouses' names ... either as Community Property or as Joint Tenants. If that's the case, then what you said is also true: Starting the day after the DOD the property's basis becomes its FMV as of the DOD, and depreciation starts over as if the property was acquired on that day. New depreciation life years ... zero accumulated depreciation. For the portion of the year the decedent was alive the basis and depreciation continue as before.

If the property was not in a community property state, than only the decedent's one-half gets a step-up in basis. In that case the surviving spouse's 50% share continues on as before, and the decedent's share gets the step-up, with depreciation starting over on that portion only.

Whether an estate tax return (F-706) is required or not, your client would be well-advised to get an appraisal, from a qualified appraiser, for all real property and even for significant items of personal property such as farm vehicles and equipment. For the latter, there are specialists who do that.

[Gretel]

Roland, I never thought I would try to argue with you since I more than appreciate any of your posts and well substantiated knowledge, but here goes:

First of all thank, and yes, appraisal is under way for well over 100 pieces of farm equipment and 3 parcels of land. The transfer to the spouse was done one month ago. It is my understanding that anything transferred within the last 3 years of death converts back to the estate of the deceased and is fully taxable on an estate tax return if applicable. Hence 100% step-up basis.

[TaxGuyBill]

The I read §1014(e), if the husband was originally the only owner of it, there won't be ANY step-up in basis. If it was co-owned, then there is a 50% step-up.

If the property was gifted within one year of death, the basis "shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent".

https://www.law.cornell.edu/uscode/text/26/1014#e

[Gretel]

The I read §1014(e), if the husband was originally the only owner of it, there won't be ANY step-up in basis. If it was co-owned, then there is a 50% step-up.

If the property was gifted within one year of death, the basis "shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent".

https://www.law.cornell.edu/uscode/text/26/1014#e

Taxguybill, above quoted law applies to appreciated property not to depreciated property. In the same code section within the list of property to receive 100% step-up basis is this:

(4)Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;

This is what I am referring to, am I misinterpreting the meaning?

[TXEA]

Gretel - If I understand your situation correctly, the deceased spouse gave the property (or part of the property) to the spouse prior to death. Unless the decedent retained an interest or some sort of control over the property prior to death, the unlimited marital deduction would have applied and there would not have been any need for the filing of a gift tax return. As such, it could be argued that the gift resulted in separate property to the recipient, and thus no step up at all is allowed (and no estate tax add back of the gift). If the deceased retained a TIC interest, then 1/2 of the transferred property would be included in the gross estate and eligible for a step-up on that one half.

Property transferred between spouses still qualifies for the unlimited marital deduction for both gift and estate tax purposes. This is assuming the gift was of a present interest and the spouse is a U.S. citizen. Thus, the filing of a Form 709 would not be required and add back to the estate not required.

See also 1014(c)(3) reflected below.

(a) Inclusion of certain property in gross estate
If—

(1) the decedent made a transfer (by trust or otherwise) of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent’s death, and

(2) the value of such property (or an interest therein) would have been included in the decedent’s gross estate under section 2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death,

the value of the gross estate shall include the value of any property (or interest therein) which would have been so included.

(b) Inclusion of gift tax on gifts made during 3 years before decedent’s death
The amount of the gross estate (determined without regard to this subsection) shall be increased by the amount of any tax paid under chapter 12 by the decedent or his estate on any gift made by the decedent or his spouse during the 3-year period ending on the date of the decedent’s death.

(c) Other rules relating to transfers within 3 years of death
(1) In general
For purposes of—

(A) section 303 (b) (relating to distributions in redemption of stock to pay death taxes),

(B) section 2032A (relating to special valuation of certain farms, etc., real property), and

(C) subchapter C of chapter 64 (relating to lien for taxes),

the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, during the 3-year period ending on the date of the decedent’s death.

(2) Coordination with section 6166
An estate shall be treated as meeting the 35 percent of adjusted gross estate requirement of section 6166 (a)(1) only if the estate meets such requirement both with and without the application of subsection (a).

(3) Marital and small transfers
Paragraph (1) shall not apply to any transfer (other than a transfer with respect to a life insurance policy) made during a calendar year to any donee if the decedent was not required by section 6019 (other than by reason of section 6019 (2)) to file any gift tax return for such year with respect to transfers to such donee.

(d) Exception
Subsection (a) and paragraph (1) of subsection (c) shall not apply to any bona fide sale for an adequate and full consideration in money or money’s worth.

(e) Treatment of certain transfers from revocable trusts
For purposes of this section and section 2038, any transfer from any portion of a trust during any period that such portion was treated under section 676 as owned by the decedent by reason of a power in the grantor (determined without regard to section 672 (e)) shall be treated as a transfer made directly by the decedent.

[TAXNJ]

Community property

Recently married, both of them are farmers with each owning their own farm business. One dies and spouse will get 100% step up for deceased (land was titled in both names only one month ago). I think so far we are good.

Here is what I believe will happen on the depreciation schedule: Deceased farmers assets will be reported on joint tax return as usual. Step up basis will create asset #2 for all assets that belonged to deceased and placed in service date will be DOD. Does this sound right?

SLUGG & TAXEA reply post address the issue well. A little confused when you say, "both of them are farmers with each owning their own farm business. One dies and spouse will get 100% step up for deceased (land was titled in both names only one month ago)."

Separate owners? Was title transfer after death?

Research the area of "community property" (if it applies) as SLUGG addresses may provide some better insight.

[Gretel]

SLUGG & TAXEA reply post address the issue well. A little confused when you say, "both of them are farmers with each owning their own farm business. One dies and spouse will get 100% step up for deceased (land was titled in both names only one month ago)."

Separate owners? Was title transfer after death?

Research the area of "community property" (of it applies) as SLUGG addresses may provide some better insight.

Thanks everyone, things get clearer. Non community property. At this moment I do not know if land and equipment was actually titled/transferred into joint tenancy or 100% with no strings attached. While they were trying to take care of these things death came too fast.

[Gretel]

Great elaboration, thanks, it's highly appreciated.

[TaxGuyBill]

Taxguybill, above quoted law applies to appreciated property not to depreciated property. In the same code section within the list of property to receive 100% step-up basis is this:

(4)Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;

This is what I am referring to, am I misinterpreting the meaning?

Although it IS "appreciated property", I misread that section (it says "and" not "or"), so it does not apply. Sorry for my error.


I don't think the 3 year rule applies (I don't see any reference to it in §1014, but I could be wrong), but as TXEA mentioned, the gift to the spouse may qualify it based on §1014(b)(10), to §2044, to §2523.

[TAXNJ]

Facts

Thanks everyone, things get clearer. Non community property. At this moment I do not know if land and equipment was actually titled/transferred into joint tenancy or 100% with no strings attached. While they were trying to take care of these things death came too fast.

Yes, once you have the important and necessary facts, much good info in the reply posts to reference, then proper decisions are made. Interesting post.

[buzzardbreath]

Appraisal - sorta NT

A few years ago a farmer I had known as a child passed away - I had been doing his tax return for the last 20 years of his life. I had a depreciation schedule for him with original value of some $1.5MM. Land was on the books for almost no purchase cost, although I doubt $5MM would have bought the land. His son is closer to my age, and I've been doing his tax return as well.

The family had an expensive estate lawyer in Brentwood/Franklin, TN, arguably the most expensive and fashionable area of Tennessee. The law firm was well known by the cream of society in those parts. Land and equipment were not that far away. These lawyers specialized in estate planning, estate and gift taxes, protection of assets, accession of wealth, etc. The lawyers asked my client if he had a depreciation schedule for the equipment, so I produced one for them.

I had a chance to see the estate tax return, where all assets were listed. The land was appraised at its millions by a licensed appraiser. There is no "licensed appraiser" for farm equipment. The best you get is a dealer who looks at it and gives you value, usually underpriced if he wants to buy it, and overpriced if he wants to sell it.

I was anxious to see how this high-powered lawyer was going to appraise the equipment. Actually turned out to be very simple.

He simply appraised it by re-establishing the original purchase cost I had on my schedule.