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For new tax on some private colleges, stepped-up basis may apply to property sold at a gain; new basis rule may limit tax impact

IR-2018-134, June 8, 2018

WASHINGTON — A private college or university, subject to the new 1.4 percent excise tax on net investment income, that sells property at a gain generally may use the property’s fair market value at the end of 2017 as its basis for figuring the tax on any resulting gain, the Internal Revenue Service said today. In many instances, this new stepped-up basis rule will reduce the amount of gain subject to the new tax. Normal basis rules will continue to apply for calculating any loss.

In Notice 2018-55, posted today on IRS.gov, the Treasury Department and the IRS said they plan to issue proposed regulations addressing this and other matters relating to the new excise tax. In the meantime, affected taxpayers may rely on the special basis step-up rule described in the notice. The notice also requests public comment on other issues addressed in the notice, as well as any other matters that should be addressed in future guidance. See the notice for details on submitting comments.
 
The excise tax was included in the Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December. The tax applies to any private college or university with at least 500 full-time tuition-paying students, more than half of whom are located in the United States, that has an endowment of at least $500,000 per student. An estimated 40 or fewer institutions are affected.

According to the notice, the basis of property held on Dec. 31, 2017, that is later sold at a gain will be not less than its fair market value on Dec. 31, 2017, plus or minus subsequent normal basis adjustments. Similarly, Treasury and IRS intend to propose regulations under which losses may offset gains to the extent of gains, but no capital loss carryovers or carrybacks will be allowed. Proposed regulations also may permit losses from property sales by related organizations to offset gains realized by other related organizations.

Updates on the implementation of this and other TCJA provisions can be found on the Tax Reform page of IRS.gov.