 Hello and welcome to this session in which we will discuss basis for inherited property. What is inherited property is a form of a gift, although we cover gift property separately, that gift is coming from someone who already passed away. Somebody passed away and left you an asset. What is the general rule when that happens? In general, the basis of an inherited property equal to the fair market value of that property at the date of the decedent's death. So the day that the person passed away, we look at the fair market value and usually that's your basis. The date of death is also referred to as the primary valuation date, abbreviated PVD, the primary valuation date. Now do you have to use the primary valuation date in the end? Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. The answer is no. There's an exception to the primary valuation date. If the executor or the administrator of the estate simply put the person in charge of distributing the asset, usually a lawyer or someone who's trusted, they may elect to use what's called alternative valuation date or AVD. Only if, so notice the rule here, this is what we need to emphasize on, we need to emphasize on the exception, only if the use of that date lowers the value of the gross estate and the value of the estate tax liability. You might be saying, hold on a second, when that be against the logic of the government, because the government wants to collect money, why would you want them to choose the lower valuation date? I will talk toward the end why they prefer this method, but this is the only way you can use the AVD. If choosing the AVD, it lowers the gross estate, it lowers how much value in the estate, and as a result, it lowers the tax liability. So when the alternative valuation date is used, the basis from the inherited property equal to the property fair value at the earlier of the six months after the death or the distribution date. So if we don't use the PVD and we use the AVD, we look from the date of death, six months from the date of death. This is the date of death, date of death. Then if we distributed the assets here and we want to use the AVD, the fair value will be on the AVD. Otherwise, if we waited till six months, it will be after six months for the date of death. The inherited property is always treated as long-term properties. You don't have to worry whether it's short-term or long-term like gifted property, and the reason is hopefully logical. Gifted property, you can plan, you can plan when to give the gift, but you cannot plan when you die. Therefore, it's always treated as long-term property. Therefore, the subsequent disposition of that property by its hair results in recognition of a long-term either a gain or a loss. Let's take a look at an example or a couple examples to illustrate these concepts. On April 14th, Jerry inherited a property valued at 25,000 from his decedent father, Ronald. Ronald acquired the property on February 3rd, 20X1 for 21,200. Believe it or not, we really don't care about how much his father got the property for. Ronald died on January 3rd, 20X2 when the property had a fair value of 23,000. On July 3rd, which is, well, if we go from January 3rd to July 3rd, six months later, the property had a value of 26,000. Let's answer a few questions about the scenario. Determines Jerry's basis for the inherited property if the primary valuation date is used. What is the primary valuation date? Is the date of death? The date of death is January 3rd, 20X2, when the property had a value of 23,000. Therefore, if the PVD is used, Jerry's basis would equal to 23,000. Let's take a look at this scenario. Determine Jerry's basis for the inherited property if the executor elects to use the alternative valuation date. If the executor elects to use this alternative valuation date, Jerry's basis for the property would equal to the fair market value at the earlier of six months after the date of death, and this question will be July 3rd, as I showed you earlier, or the distribution date, which happens to be April 14th, 20X2. Given that the property was distributed within less than six months from the date of death, Jerry's basis would equal to the fair market value of the distribution date, which is 25,000. Now, it's very important to highlight that the decedent basis for property is irrelevant. Notice here, we don't care about Ronald's basis. It's just basically distracting information. Also, Jerry would recognize a long-term gain or loss for the subsequent disposition of the property, regardless of the date on which the disposition occurred whenever he sells it. Now, bear in mind that the date of death the fair market value of the property is 23,000. Now, technically, we cannot use the 25,000 because it increases the estate, but we'll look at this scenario in the next session. I just want to show you how you would choose the alternative valuation date. Let's take a look at this example illustrating, in a real example, in a more realistic situation, the alternative valuation date. Celine inherited all her mother's properties with has a total adjusted basis of 1,220,000 and a fair value on the date of death of 3.5 million. Six months after the date of death, the property had a fair value of 3.7 million. Well, let's see what we have. Is the executor of the estate allowed to elect the alternative valuation date provided that the distribution, remember, the distribution occurred eight months following the date of death. So the distribution did not happen until eight months after the death. So eight months after the death. So this is date of death. This is six months and this is eight months. Okay. Is the executor allowed to do so? Well, the executor of the estate may elect to use the AVD alternative valuation date only if the use of the AVD lowers the value of the gross estate. Well, guess what? That's not the case. Six months later, the AVD is the earlier of six months or the following the death or the distribution date, which is the distribution date cannot be counted because it's not earlier. In this question, it's six months after the death. Can they select this? Well, they cannot. At the date of death, the fair value of the property was 3.5 million. And after six months, that amount increased to 3.7. So the executor cannot elect this date. They cannot elect the alternative valuation date. They have to elect the primary valuation date, which happens to be 3.5 million. Once again, why? Why would the government don't want you to be taxed on the 3.7 million? Well, for one reason is the estate tax. To be taxed on the estate tax, you have to have really high income, not high income, high gross value, which is you would learn about this later on. So 3.7 million will not even be taxed altogether. So what the government will prefer, the government will prefer that the asset goes to Celine and Celine eventually pays the pays the pays the taxes, which is Celine is the beneficiary. And that's that's why they prefer this. They prefer the many pays the taxes later on. So what should you do now go to Farhat lectures, whether you are a CPA, EA, or an accounting student, work MCQs, look at additional resources, learning the basis of assets is important, whether it's gifted property or inherited property, study hard, good luck, and of course, stay safe.