Form 8939 Instructions for Allocating Basis Increase

Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, is an obsolete tax form used exclusively for the estates of individuals who passed away during the 2010 calendar year. This form was a product of the Economic Growth and Tax Relief Reconciliation Act of 2001, which scheduled a one-year repeal of the federal estate tax for 2010. The Tax Relief Act of 2010 later retroactively reinstated the estate tax but provided an option for these specific estates.

The purpose of Form 8939 was to allow the executor of an estate to formally elect out of paying any federal estate tax. In exchange for this exemption, the estate had to use a “modified carryover basis” system instead of the traditional “stepped-up basis” at death. This meant beneficiaries would inherit property at a basis closer to what the decedent originally paid, impacting their future capital gains tax liability.

Who Was Required to File Form 8939

The decision to file Form 8939 rested with the executor of an estate for a person who died in 2010. Legislation gave these executors a choice: they could either apply the reinstated estate tax rules for 2010, which included a $5 million exemption and a 35% top rate, or they could file Form 8939. Filing the form constituted a formal, irrevocable election to opt out of the estate tax system for that year.

This election was primarily for estates where the total value of assets was large enough to benefit from the basis increase provisions. Filing was necessary when the fair market value of the decedent’s property (other than cash) exceeded $1.3 million. By filing, the executor chose to navigate the modified carryover basis rules under Internal Revenue Code Section 1022, foregoing the traditional step-up in basis under Section 1014.

Information and Decisions Needed for Preparation

Before an executor could complete Form 8939, a significant amount of information had to be gathered and several strategic decisions made. The first step involved collecting identification details, including the decedent’s full name, Social Security Number (SSN), and date of death, as well as the executor’s name and address.

A comprehensive inventory of beneficiaries and property was necessary. The executor needed a complete list of every individual receiving property from the estate, along with their Taxpayer Identification Number (TIN). For each piece of property being transferred, the executor had to compile a description, the decedent’s adjusted cost basis, and its Fair Market Value (FMV) as of the date of death.

The next step involved planning the allocation of two available basis increases. The law provided a $1.3 million General Basis Increase (GBI) that could be allocated among any of the assets passing to any beneficiary. An additional $3 million Spousal Property Basis Increase (SPBI) was available specifically for property passing to a surviving spouse. The executor had to strategize how to distribute these increases to provide the maximum tax benefit.

This allocation was subject to a primary constraint: the tax basis of any single asset could not be increased beyond its fair market value on the date of the decedent’s death. The strategic decision for the executor was to apply the increases to assets that had appreciated the most, meaning those with the largest gap between their original cost basis and their current FMV. This approach would reduce the future capital gains tax for beneficiaries.

A Part-by-Part Guide to Completing the Form

With all information gathered and allocation strategies decided, the executor could proceed with filling out Form 8939. The form was structured to translate the preparatory work into a formal tax document. The first part of the form was for entering decedent and executor information and for calculating the available General Basis Increase and, if applicable, the Spousal Property Basis Increase.

The core of the form consisted of detailed schedules for allocating these basis increases. On these schedules, the executor documented the allocation decisions, listing each asset’s description, value, and the specific dollar amount of the basis increase being allocated to it. This grid served as the official record of how the basis increases were distributed. The form required the signature of the executor under penalties of perjury, affirming that the information provided was true and complete.

Filing Requirements and Notifying Beneficiaries

After Form 8939 was accurately completed and signed, the executor had to follow specific procedural steps for filing and notification. The completed form, along with any accompanying schedules, was mailed to the Internal Revenue Service. The original due date was extended multiple times, with the final deadline landing on January 17, 2012.

A post-filing responsibility was to inform each beneficiary of their new tax basis in the property they received. The executor was required to provide a statement to every beneficiary that detailed the specific property received, its fair market value, the amount of basis increase allocated to it, and the final calculated basis of the property. This statement is an important document for the beneficiary’s personal tax records, as it provides the official cost basis needed to calculate capital gains or losses upon a future sale.