There’s a dirty secret that when selling inherited property, some beneficiaries overstate the original value of it on their income tax returns to lessen the tax hit. That’s long irked the Internal Revenue Service, and a new law tucked into the summer’s highway bill cracks down on the practice. Although executors and beneficiaries of estates with tax returns filed after July 31, 2015 have to mind the new law, they’re still stuck waiting for Internal Revenue Service guidance on exactly what to do by a February 29, 2016 deadline.
How much “cheating” is going on? The new basis consistency and reporting requirements are estimated to bring in an additional $1.5 billion to the Treasury over the next 10 years. “The IRS knew it was going on, and they wanted to close it,” says Todd Steinberg, an estate lawyer with Greenberg Traurig in Tysons Corner, Va.
Via a “step-up in basis,” appreciation on assets held at death escapes income tax, but any appreciation after that gets hit with a federal capital gains tax of up to 23.8% when you sell the asset. Before the new law, beneficiaries weren’t tied to the value the estate put on an asset; they could ignore it and argue for a different value, says Steinberg. That meant potentially huge tax savings in the case of hard-to-value assets like real estate and privately-held businesses. For rich people taking advantage of this wiggle-room, the crackdown is a big deal.