Publication Date - July 2006

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Chapter 2/ Table of Contents / Chapter 4
Tax Code, Regulations and Official Guidance Search

Chapter Three - Basis on Farm Assets

• Introduction
• Like Kind Exchanges
• Gifted Property
• Inherited Property
• Farm Sale
• Cost Recovery - Depreciation and Depletion

Inherited Property

The basis of any property, real or personal, acquired from a decedent is usually its FMV on the date of the decedent’s death. If the farm is a joint holding, the surviving spouse is entitled to a stepped-up basis on ½ of such property. If a federal tax return is required and if the property must be included in the decedent’s gross estate, the basis is the FMV at the date of death, or, if elected, the alternate valuation date.  Under this method, property is valued at the date six months after the decedent’s death, if not sold or otherwise disposed (See IRC § 2032 for other information on alternate valuation.).

The basis in inherited property may be figured under the special ”farm real property valuation method.”  IRC § 2032A. This method values the qualified real property at other than its FMV by valuing it on the basis of its use as a farm.  If this method is used for estate tax purposes, the value is elected as the basis of the property for the heirs. The qualified heirs should be able to get the value from the executor or personal representative of the estate.

The basis of the property for the qualified heir who receives special-use valuation property is the estate’s or trust’s basis in that property immediately before distribution. If gain is recognized because of post-death appreciation, the basis is increased by this amount.

Post-death appreciation is the difference between the property’s FMV on the date of distribution and the property’s FMV on either the date of the farmer’s death or the alternative valuation date.

If the farmer makes an irrevocable election and pays the interest on the additional estate tax figured from the date nine months after the decedent’s death until the due date for paying the additional estate tax, then the basis in the property is increased to its FMV on the date of the decedent’s death or the alternative valuation date. The increase in basis is considered to have occurred immediately before the event that results in additional estate tax. An election is made by filing Form 706 -A with a statement containing: the farmer’s name, address, and Taxpayer Identification Number; the estate’s name, address and identification number; a statement identifying the election as an election under IRC § 1016(c); and a list specifying the property for which the election is made.