Form 1099-S

A bequest is one of the exceptions to having to file a 1099-S. That doesn't mean that one will never be generated. It's just not required.

Its not as straightforward as that.

When someone dies the basis in their property that passes through to their heirs is ADJUSTED up or down to market value. We frequently talk about the "step-up" in basis on death, but its really a "basis adjustment" and it can go up or down. The first step is to determine what the adjusted basis is in the inherited property.

Now when that property is sold most title companies will issue a 1099-S to report the sale of the real estate. There are several exceptions to the issuance of a 1099-S, but not being tax professionals most don't know that there is anything other than the principal residence exception, so the

1099-S gets issued.

When you do the tax return for someone who sold inherited property you get to do several really neat things -

A - you get to use the decedent's date of acquisition as the date acquired. So if gramps bought that cabin 30 years before your client was born you can still report the date acquired as the date gramps bought the cabin.

B - you report the cost basis of the property based on the adjusted basis used when gramps died, or the alternate valuation date whichever date and value was adopted by the executor or personal representative.

C - you get to ADD to the adjusted cost basis any costs associated with selling the property - settlement costs and such.

Now you start with the sale price and subtract the adjusted tax basis and that will give you the gain or loss. If the property increased in value AFTER gramps died but before it was sold there may be a reportable and taxable gain. But if the property has NOT increased in value then you will likely show a LOSS on the sale - remember the starting point for basis is the value when gramps died. Add to that your settlement costs and now the basis is greater than the sale price, hence a reportable loss on the sale.

So while the proceeds themselves are not taxable, they may created a gain or a loss. You need to factor in all the pertinent information before you'll know for sure.

Good luck, Gene E. Utterback, EA, RFC, ABA

Gene, you must be thinking of gifts of appreciated property.

For inherited property, you use INHerited as date acquired during the first year, then use either INH or date of death or AVD thereafter.

The holding period for inherited property is always long term even if the decedent bought it two days before death, and the heirs sold it a month later.

Incorrect. One lists the literal "INHERITED" instead of a date.

Incorrect. One uses the FMV of the property (date of death or alternative date), not the adjusted basis. There is NO depreciation to account for.

Although in effect, true, costs of sale aren't a basis adjustment, so one doesn't actually add them to basis. However, one does sum the basis and the costs of sale on the tax return.

Gene: You've been working too hard....

Let me address that last comment first - I agree completely, I am working way too hard!

As my esteemed colleagues Art Kamlet and D. Stussy have pointed out - you don't actually SHOW the date gramps bought the property as the date acquired, you use some abbreviation of the word INHERITED or whatever your software allows. My point, though perhaps poorly made, was that you get to use gramps holding period. Technically it is possible that if gramps bought the property shortly before he died and it was sold soon after inheritance you could have a short term gain. I should have been clearer on this point.

For my esteemed colleague, Mr. Stussy - I appreciate your pointing out my misstatement. I said "adjusted basis when gramps died" when I MEANT "adjusted to FMV". I know what I meant but my post wasn't clear enough to convey it as I meant it.

I also see that you noted "there is no depreciation to account for" and I'm not sure where this came from as my post made no mention of depreciation. Though perhaps the incompleteness of my post and my reference to adjusted basis could have misled you to believe that I factored in depreciation. Though it could be possible that after inheritance the property was used in a trade or business. If that did happen then one would factor in depreciation, but that would be based on the adjusted basis of the property after inheritance and any depreciation claimed afterward.

Regarding my use of the term "adjusted basis". After nearly 30 years in this business we have become accustomed to saying "stepped up basis on death" when in fact the basis isn't always stepped up, sometimes - especially in many of the real estate markets we have now, that basis is stepped down. It was my intention to say what really happens - the basis gets adjusted at the date of death, or the alternative valuation date. I think its incorrect to say "stepped up", though that is the phrase we've all come to use as real property generally does go up in value over time.

I will try to A)take a nap; and B) get a massage so that posts are more clear in the future .

Gene E. Utterback, EA, RFC, ABA

Gene

We've all probably been working too hard.

In my previous message I pointed out that inherited property is always deemed to be held long term. In your scenario, if gramps buys property a week before he dies, and it is sold by the heirs a week after death it is deemed to be held long term.

Snipped

Let me be real clear - what Arts suggests my position took is NOT the position I meant to suggest. If gramps buys the property one week before he dies and the heirs sell it one week after he dies the holding period, IMO, is short term.

Thanks to Art and the other fine professionals here who help keep me straight. I swear, I think I'm getting a little "slap happy" this season!

Gene E. Utterback, EA, RFC, ABA

Here is a cite from the 1040 Sch D instructions:

Page D-6 "If you disposed of property that you ac- quired by inheritance from someone who died before 2010, report the gain or (loss) on line 8 and enter INHERITED in col- umn (b) instead of the date you acquired the property. If you inherited the property from someone who died after 2009, see Pub.

4895."

While that paragraph is long winded and discusses the dual methods available for 2010 only for recognizing step up vs not filing estate tax forms, the noteworthy item above is that inherited property is reported on Schedule D Line 8. Line 8 is long term.