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IRS issues a favorable ruling regarding Income in Respect of a Decedent

Generally, beneficiaries of a decedent’s estate are not required to pay income taxes on the value of the transferred property. However, some assets generate what is known as Income in Respect of a Decedent (IRD). IRD generally arises from assets that would have been included in the decedent’s gross income had he or she lived. Additionally, many assets that generate IRD do not receive the same step-up in basis as most other inherited assets. A few examples of assets that may generate IRD are: deferred annuities; IRAs; qualified retirement plans; EE Bonds; and employment bonuses and commissions.

In a recent private letter ruling, the Internal Revenue Service (IRS) addressed the issue of whether income from the sale of real property under a contract entered into before the decedent’s death is IRD. In this case, the decedent entered into a contract to sell real property. Prior to closing, the parties discovered a gas pipeline on the property, which caused the closing to be delayed. Before the parties could resolve several issues relating to the pipeline, the decedent died. The IRS stated that entering into a contract to sell real property prior to the decedent’s death typically converts the gain from the sale into IRD; however, since there were “economically material contingencies” here that had to be addressed before the sale of the property, no IRD was generated in this case. This is a favorable result, allowing the estate to obtain a basis step-up to the estate tax value. If the estate tax value is the same as the sale price, all capital gains will be eliminated.

If you have an estate with an open contract for sale, talk to us about how to achieve the same kind of favorable result.

  • Partner

    John is Chair of the firm's Estate Planning Department. He also leads the firm's Senior Partner Committee, and is a member of the firm's Finance Committee. John, a former Certified Public Accountant, began his career in the tax ...

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