What Is IRS Form 8939 and Is It Still Used?
Explore the unique history of IRS Form 8939, a form for a temporary 2010 tax law change that was later made obsolete by the return of stepped-up basis rules.
IRS Form 8939, “Allocation of Increase in Basis for Property Acquired From a Decedent,” was a specialized tax form created for the estates of individuals who passed away during 2010. The form’s existence is tied to a one-year legislative anomaly affecting the federal estate tax. Due to subsequent tax law changes, this form is now obsolete for nearly all taxpayers. Its function was to navigate a temporary set of rules for determining the tax basis of inherited property.
The 2010 Estate Tax Context for Form 8939
The creation of Form 8939 is rooted in the tax environment of 2010. For that year, the federal estate tax, a tax on the transfer of a person’s assets after death, was temporarily repealed by a 2001 tax law. This repeal meant that no federal estate tax was due for decedents of any wealth level, but it came with a trade-off involving how the value of inherited assets was calculated for future tax purposes.
In place of the estate tax, Congress implemented a “modified carryover basis” system for 2010. Normally, an heir receives a “stepped-up basis,” where the asset’s cost basis is adjusted to its fair market value on the date of death, reducing future capital gains tax. Under the 2010 rules, this step-up was eliminated, and the heir inherited the decedent’s original cost basis.
To soften this, the law allowed an estate’s executor to make a “Section 1022 Election” to selectively increase the basis of certain assets. Form 8939 was the instrument created by the IRS for executors to make this election and report the allocation of this basis increase.
Who Was Required to File
Filing Form 8939 was not a universal requirement for estates of individuals who died in 2010. A law enacted late in that year retroactively gave executors a choice. They could either pay estate tax under reinstated rules with a $5 million exemption and receive a full stepped-up basis, or they could elect to have no estate tax apply and use the modified carryover basis rules.
Only if the executor affirmatively chose to opt out of the estate tax and use the modified carryover basis regime was Form 8939 required. This election was generally advantageous for estates valued at more than the $5 million exemption amount. The final deadline for filing Form 8939 to make this election was established by the IRS as January 17, 2012.
Information Required for Allocation of Basis
Completing Form 8939 required the executor to gather detailed information about the decedent’s property. This included providing a description of each asset, its fair market value (FMV) on the date of death, and the decedent’s original cost basis. The core of the form was an allocation process designed to distribute a limited amount of basis increase among these assets.
This process was centered on two main allowances. The first was the “General Basis Increase,” which allowed the executor to increase the basis of the estate’s assets by a total of up to $1.3 million. The second allowance was the “Spousal Property Basis Increase,” which provided an additional $3 million in basis increase that could be allocated specifically to property passing to a surviving spouse.
The executor had to strategically decide how to distribute these basis increases across various assets, such as stocks or real estate. The goal was to apply the increase to assets with the lowest original basis and highest appreciation to minimize future capital gains taxes for the beneficiaries.
Current Status and Implications of Form 8939
Form 8939 is now obsolete from a filing perspective, as the final deadline for 2010 estates was in early 2012. The election to use the modified carryover basis by filing Form 8939 was irrevocable, meaning the choices made at that time have lasting implications.
For the estates that filed Form 8939, the modified carryover basis rules still apply. Heirs of these estates must use the basis as calculated on that form to determine their capital gains when they sell the inherited property.
For the vast majority of 2010 estates that did not file, the executor chose to be subject to the estate tax in exchange for a full stepped-up basis on all assets. Subsequent legislation solidified the estate tax rules for years 2013 and onward, making the 2010 scenario a unique event in tax history.