Acquired date for sched D on house inherited in 2010 and later sold in 2010?

Question

This asks some questions by making some guesses as a starting point for figuring things out. I understand that logic is of limited use in figuring out tax rules.

The 2009 Schedule D instructions says "If you disposed of property that you acquired by inheritance, report the disposition as a long-term gain or loss, regardless of how long you held the property. "

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also says"If you disposed of property that you acquired by inheritance,report the gain or (loss) on line 8 and enter ?INHERITED? in column(b) instead of the date you acquired the property." But that is the *2009* instructions. The 2010 instructions will be a long time coming I expect.

Here are my questions:

Suppose the case of a house acquired for ,000 in 1980 is passed by the estate after a 2010 death. The value at time of death is ,300,000. Assume that the basis is not stepped up by the executor. I would guess that with the 2010 rules, the basis is ,000 with a 1980 date entered in the line 8 Acquired column.

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that "The executor of the deceased?s estate may increase theincome tax basis of the estate assets by up to .3 million in theaggregate. In addition, if the deceased is married, the executor mayallocate an additional million increase to the basis of assetsthat pass to the surviving spouse." Suppose the executor steps up the house basis to ,000,000. I would guess that the final 1040 pays long term capital gains on the 0,000 increase at the 15% rate, and that the new basis is ,000,000. Right? Or would the CG be paid on the 1041 as some higher rate?
After the basis is stepped up to ,000,000 the inheritor sells the house for ,300,000. Capital gains tax is paid on the 0,000 and ?INHERITED? is entered in column (b) of line 8 (long term gain).

Arthur Kamlet · Accepted Answer

I'd guess too.If I were in charge, I'd force allocation of the house into twoseparate properties, one that was stepped up to 1 million basis andLT holding period or DoD holding period, whichever applies, anda second property that retains old remaining basis and acq date.I haven't thought much about just how to allocate.See two separate properties notion.  I have no actual idea howthis will work out.  I'm still hopeful Congress will retroactivelyrestore the estate tax rules and just fiddle with the numbers.

removeps-groups · Answer

Why does the decedent pay tax on the 970k step up?  My understandingis the 970k is a freebie.

Arthur Kamlet · Answer

None of the above was written by me nor reflects my views.

DF2 · Answer

I intended to ask some questions by making what I thought would be a reasonable guess as a starting point for figuring things out. In my searches, I had not found a clear description of how this all works. I also did not find this previously discussed at length in misc.taxes.moderated. So my intention was to create a straw man description that would probably have a mix of truth and ignorant speculation. Thanks for pointing out this incorrect hypothesis. There may be more. I am not a pro. Neither am I an executor. But I still was trying to figure this out.

So may I infer that the executor can designate pieces and amounts to step up the basis of up to $1,300,000 total max assuming no surviving spouse? I can imagine that this could call for some thought as to how to optimally distribute things. For example, I guess you would tend not step up the basis of a house that the recipient intends to use as a primary residence. You would tend step up the basis for something that would probably be liquidated by the estate before passing out cash.

Acquired date for sched D on house inherited in 2010 and later sold in 2010?

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