Farm Estate and Succession Planning
This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.
"Income in Respect of Decedent" - A potential issue in estates
Mar 01, 2012
When a farmer passes away their estate may include property that is income to that person, but was never taxed during the person’s life. This is known as “income in respect of decedent” (IRD.) IRD is subject to both income tax and estate tax (if the net worth is large enough.) One example of IRD includes property sold on a contract, but the completion of the contract occurs after death.
Why does it matter? Generally, when someone dies, their property will receive a step up in basis equal to the fair market value of the property at the time of death. When the property is sold there is generally little tax ramifications because its basis is stepped up. If an asset is deemed to be IRD income, then the heir / beneficiary receiving the property will pay income tax on it without being allowed to receive a step up in basis. This creates a large disparity in tax liability, depending on the character of the asset.
There are "governing rules" with this; however, what constitutes IRD can vary depending on the type of income received, the accounting method used, and when the income is actually received. Arguably the most difficult question in the area of IRD is determining which receivables are subject to IRD treatment. Depending on the situation and character of the receivable can result in a very different tax treatment.
If you are working through an estate where there is a question of IRD, it is important to get professional assistance to work through the complexities.
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Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.