When a property is inherited, there are often conflicting interests when it comes to determining the basis of that property. For executors, it is beneficial to value the property as low as possible in order to minimize associated estate taxes. However, for beneficiaries, it is in their best interest to value property as high as possible, for capital gain, should they decide to sell it down the road. This conflict of interest results in a lower basis being reported to the IRS, yet distributing the asset on a higher basis than was reported for tax purposes.
Louisiana's Estate Basis Consistency Rule was put in place to eliminate these inconsistencies and is a law that you need to be aware of when it comes to inherited property. This is your guide to everything you need to know about this little piece of legislation that can make a big impact on how inherited property is handled.
What is the Estate Basis Consistency Rule?
This legislative change went into effect on July 31, 2015, and ultimately affects how executors and beneficiaries file reports with the IRS concerning inherited properties. According to the CPA Journal, the Basis Consistency Rule states that the beneficiary's basis for the inherited property must be consistent with the property's estate tax value. The basis of a piece of property is considered to be the original cost of the property with adjustments made for varying factors such as depreciation.
The Purpose of the Estate Basis Consistency Rule
Before this law was put into place, inherited property basis' was able to be lowered for tax purposes and increased for distribution properties. This created inconsistencies as to the actual value of the property and confusion down the road when the property was either reevaluated or put on the market to sell.
The Estate Basis Consistency Rule was put in place to essentially eliminate tax fraud. The idea is to prevent executors from reporting a lower property value for estate tax purposes and then turning around and distributing the same exact property to its beneficiaries with a higher than reported basis. As a general rule of thumb, the income tax basis of the inherited property cannot exceed the property's fair market value.
What Estates and Properties are Subject to This Legislation?
It should be noted that not every piece of property is subject to the Basis Consistency Rule. It applies to property that increased the beneficiary's estate tax liability. Property that is eligible for the marital or charitable estate tax deduction does not fall under this law because it does not increase the beneficiary's estate tax liability. An experienced attorney can help you determine if the property in question is subject to this law.
In some cases, for various reasons, estates and properties may be omitted from the filing process. In many cases, this is an unintentional occurrence and is not discovered until the executor reads the will. If acted on in a timely manner, the situation can be rectified. Beneficiaries must take a basis of zero for properties that have been omitted from the filing process. However, if the executor files an amended 8971 form within the appropriate statute of limitations, the beneficiary will be able to claim the property value basis that is equal to the basis reported for income tax purposes.
What are the Penalties for Failing to Comply?
This is a very serious law with very serious consequences if found in compliance. The legislation requires that estates and properties provide information about the value of any inherited property to the IRS, as well as information about the person who inherits it. Failure to comply with these laws leaves you vulnerable to two types of penalties:
- Accuracy-related penalties
- Failure-to-file penalties
Depending on the infraction, you may be subject to one or both of these penalties. Accuracy-related penalties involve a failure to report a consistent basis and typically involve an underpayment of taxes. The solution to this type of penalty is typically to make up the difference in taxes. On the other hand, failure-to-file penalties are associated with failure to correctly report information about the inherited property. The proper documents must be submitted in order to correct this issue along with any monetary fines imposed based on the infraction.
Make Sure You Stay in Compliance with the Basis Consistency Rule
Discovering an inherited piece of property is not in compliance with Louisiana's laws and regulations can cause a major delay in the settling of assets. The last thing you need or want when handling inherited property is harsh penalties or fines. Navigating the legalities of making sure all paperwork is properly filed is time-consuming and can be confusing if you do not specialize in the legal field. That's where we come in. Brown Weimer, attorneys and counselors at law is Louisiana's premier legal experts in inherited estates and properties.
How Can We Help?
Whether you are an executor or a beneficiary, our experienced attorneys will make sure all inherited properties remain in compliance with all of Louisiana's inheritance laws including the Basis Consistency Rule. Contact us today at (504) 561-8700 and let us take the hassle out of property inheritance.