Basis, Portability, and Transfer Tax Returns
Basis rules
Know the difference between carryover basis (gifts) and stepped-up (or stepped-down) basis (property included in the decedent's gross estate, generally fair market value at death). The step-up eliminates pre-death appreciation but not IRD. For gifts, the donee generally takes the donor's basis; for loss property, dual basis rules may apply.
Portability
Portability allows a surviving spouse to use the deceased spouse's unused exclusion amount (DSUE) if a timely estate tax return is filed. The election requires a complete and timely Form 706, even if no tax is due. The portability election does not apply automatically; it must be affirmatively made.
Transfer tax returns
Form 709 reports gifts; Form 706 reports estates. Know filing thresholds, due dates (including extensions), and the consequences of failing to file. The gift tax return is generally due April 15 of the following year; the estate tax return is generally due nine months after death, extendable.
Traps
- The step-up applies to property included in the gross estate, not to IRD.
- Portability requires a timely filed return; missing the deadline can forfeit DSUE.
- A surviving spouse's remarriage can affect DSUE in some circumstances.
- Gifts above the annual exclusion require a Form 709 even if no tax is due.
Worked example
Decedent's stock, purchased for $50,000, is worth $200,000 at death and passes to her child. The child takes a $200,000 basis; sale at $200,000 produces no gain. Had the stock been gifted during life, the child would carry over the $50,000 basis.