Stepped Up Basis on Installment Note?

[WhiteOleander]

Married clients have an installment note on some land. It was originally for 15 years. Now it has about 7 years left.
Husband died at end of 2004. So, doesn't the note receive a stepped up basis? Does this mean that the principal portion of the payment no longer has to be reported? Only the interest?
The note says that it will continue as written if either party dies. And if both die, it goes to the estate.

[Joe Btfsplk]

Stepped up basis of note

If the note had a different value at the date of death, then a stepped up basis would apply to the note in the event the note were sold.

I don't think it would affect the capital gain.

[Gene V]

No Step up base in an Installment obligation

From Pub. 559
Installment obligations. If the decedent had sold property using the installment method and you collect payments on an installment obligation you acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Include in your income the same profit the decedent would have included had death not occurred. For more information, see Publication 537, Installment Sales.
If you dispose of an installment obligation acquired from a decedent, the rules explained in Publication 537 for figuring gain or loss on the disposition apply to you.

[dmj4]

Keep in mind...

that the sale actually occured when the decedent was alive. Had it not been an installment sale, the tax would have been paid then. The death of the decedent does not take away the tax liability for a previously sold asset through stepped-up basis.


A school that I attended a few years ago talked about poor tax planning being recommended to TP to sell on installment sale to avoid the tax if they should die before the payments were completed.

[WhiteOleander]

Thanks guys. I kinda thought that the wife would continue on as usual. But, I just wanted to make sure.

[Joe Btfsplk]

Avoiding tax after death

that the sale actually occured when the decedent was alive. Had it not been an installment sale, the tax would have been paid then. The death of the decedent does not take away the tax liability for a previously sold asset through stepped-up basis.


A school that I attended a few years ago talked about poor tax planning being recommended to TP to sell on installment sale to avoid the tax if they should die before the payments were completed.

I doubt that he would pay tax after he died. Someone else would pay it.

[Snaggletooth]

Much Ado

Let's stop and think about Oleander's original question, and how there can even be an issue.

How can there even BE a stepped up basis for something which is in effect a Receivable?
If someone borrowed $150,000 for land, and at the time of death they still owe $100,000, what kind of case can you make that the value of the receivable is anything BUT $100,000?

I am aware that if maturity value is considered, and the discounted value is different than $100,000, that some kind of feeble case can be made for adjusting the value, especially if there is no option for the borrower to pay out. But you really have to strain at a gnat...

[Bees Knees]

Stepped-up basis

Not all property inherited from a decedent receives stepped-up basis treatment. TTB, page 21-28, top of second column lists several things that do not receive stepped-up basis treatment. The second, "Income in respect of a decedent" is a broad category that includes installment sale income, but can also include W-2 wages, accounts receivable, lottery winnings being paid out over a number of years, etc.

IRAs are another big example of something you can inherit that doesn't receive stepped-up basis treatment.