What Is Form 8939 and Who Was Required to File It?

Form 8939, “Allocation of Increase in Basis for Property Acquired From a Decedent,” was a specialized information return for the estates of individuals who died specifically in the year 2010. This was necessary because of a temporary, one-year legislative change that altered how the value of inherited property was calculated for tax purposes. The form was the mechanism through which executors could navigate a new system and officially report their decisions to the Internal Revenue Service (IRS) following a brief suspension of the federal estate tax.

Understanding the 2010 Modified Carryover Basis Rules

When an individual inherits property, the asset’s cost basis for tax purposes is “stepped up” to its fair market value (FMV) on the date of the original owner’s death. This rule, found in Internal Revenue Code Section 1014, erases any built-in capital gains that accrued during the decedent’s lifetime. For 2010, however, the estate tax was temporarily repealed by the Economic Growth and Tax Relief Reconciliation Act of 2001, and Congress implemented a “modified carryover basis” regime under Internal Revenue Code Section 1022.

Under a pure carryover basis system, an heir would inherit the decedent’s original adjusted basis in the property. This would mean that if the heir later sold the asset, they would be responsible for the capital gains tax on all prior appreciation. The “modified” part of the 2010 rules provided a relief mechanism, allowing the executor of an estate to selectively increase the basis of assets, but only up to a certain aggregate limit.

The law provided two specific pools of basis increase that an executor could allocate. The first was a $1.3 million General Basis Increase, which could be spread across any of the assets the decedent owned at death. The second was a $3 million Spousal Property Basis Increase, which could only be allocated to property that passed to the decedent’s surviving spouse.

Who Was Required to File Form 8939

The legal obligation to file Form 8939 fell upon the executor of an estate for a person who died in 2010. An executor is the person or institution named in a will to administer the estate or, if none is named, an individual appointed by a court. If no executor was formally appointed, any person in possession of the decedent’s property was permitted to file.

Filing was not required for all 2010 estates, as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 gave executors a choice. They could either be subject to the 2010 estate tax, with its $5 million exemption and 35% rate, or opt out and use the modified carryover basis rules.

An executor only filed Form 8939 if they chose to apply the modified carryover basis rules, making what was known as the Section 1022 Election. This decision required an analysis of which system would be more beneficial for the estate and its heirs. The filing deadline was January 17, 2012, with no automatic extensions available.

Required Information and Basis Allocation Calculations

Decedent, Executor, and Beneficiary Information

Completing Form 8939 required gathering identifying information. The executor needed to provide the decedent’s full name, Social Security number (SSN), and date of death. The form also required the executor’s own name, address, and taxpayer identification number (TIN). Finally, a list of every beneficiary who received property from the estate was needed, along with their name, address, and TIN.

Detailed Property Information

The form required a comprehensive inventory of the property acquired from the decedent. For each asset, the executor had to provide a detailed description, such as real estate or a stock portfolio, and the decedent’s date of acquisition. The two financial data points for each asset were the decedent’s adjusted basis at the time of death and the asset’s fair market value (FMV) on the date of death.

Basis Increase Allocation Rules

A fundamental constraint governed the allocation process: the basis of any single asset could not be increased above its FMV on the decedent’s date of death. For example, if a stock was purchased by the decedent for $20 and was worth $100 on the date of death, the executor could allocate up to $80 of basis increase. This rule prevented the creation of artificial tax losses.

Calculation and Allocation Strategy

The executor’s task was to allocate the available $1.3 million General Basis Increase and, if applicable, the $3 million Spousal Property Basis Increase. This involved calculating the total potential appreciation across all estate assets, which is the difference between total FMV and total basis. The executor would then distribute the available basis increase pools to minimize the future tax impact on the beneficiaries, often by prioritizing assets with the largest built-in gains.

Step-by-Step Guide to Completing and Filing

The process of completing Form 8939 involved entering the previously gathered data and allocation decisions onto the official IRS document. Part I of the form was for the general information of the decedent and executor and is where the executor formally made the irrevocable Section 1022 Election. Part II served as the schedule for listing every asset and its financial details.

Parts III and IV were where the executor reported the specific allocation of the basis increases. Part III detailed the allocation of the Spousal Property Basis Increase to assets passing to the surviving spouse. Part IV was used to report the allocation of the General Basis Increase among the other estate properties.

After all sections were completed, the executor was required to sign the declaration on page 1 under penalties of perjury and mail the completed form to a specific IRS service center. The executor also had a duty to furnish a statement to each beneficiary. This statement officially informed the recipient of their new, adjusted tax basis in the inherited property and was required within 30 days of filing.