March 22, 2016

Expanded Cost Basis Reporting is Here! Are you Ready?

 |  By: Paul Neiffer

The Surface Transportation and Veterans Health Care Improvement Act of 2015 (those two don't really go together) added new tax laws that require executors to file cost basis information with the IRS.  This is required only when there is a taxable estate.  The rules on implementing this can be complicated, but I wanted to provide some information from the new Regulations that interpret this new law:

•The basis reporting is due within 30 days of when the Form 706 (estate tax return) is due or filed whichever is earlier.  This basis information is reported on Form 8971 and is filed with the IRS AND given to each beneficiary of the estate.  Form 8971 will list the cost basis of each estate asset (except certain limitations for assets such as cash or other assets that basis is "not important") and will also list the name and identification number of each beneficiary.

•The executor is required to list all potential assets that may go to each beneficiary (since in many cases it may take several years to finally transfer assets to each of the beneficiaries).

•The executor is then required to file an updated Form 8791 when the final allocation to the beneficiary is determined.

•The law indicated that the executor was required to transmit this information, however, it appears the Regulations have added a new requirement regarding subsequent transfers of inherited assets by beneficiaries to related parties.  In this situation, the beneficiary is required to file Form 8971 if they transfer an inherited asset to a related party within 30 days of transfer.

Although this law adds another layer of complexity to the administration of estates, there is some good news from this new law.  I don't know how many times a year I get emails or questions regarding what the farmer's tax basis is on inherited land that is now being sold.  With this new filing requirement, many of these farmers will actually have a Form telling them the cost basis.  However, it only applies if there was a requirement to file Form 706 and for 2016 you needed to be worth at least $5.45 million to file.