The Step-Up in Basis for Art: What the Rules Say

When a collector dies, the basis of the art their heirs receive is set by a value on a date. That value has to be established, documented and defended. This note sets out what the US rules say, with links to the law, and the records an estate needs. It is not tax advice. The estate’s attorney and tax advisor decide.

What the Rules Say

Under IRC §1014(a), property acquired from a decedent generally takes a basis equal to its fair market value at the date of death. The rule covers art, collectibles, jewelry and other tangible personal property, as well as real property and securities.

The rule applies to property acquired from a decedent. It does not depend on whether the estate owes estate tax.

The Alternate Valuation Date

Under IRC §2032, the executor may elect to value the gross estate six months after the date of death. Property sold, distributed or otherwise disposed of within those six months is valued on the date of that disposition. The election is allowed only if it reduces both the value of the gross estate and the combined estate and generation-skipping transfer tax. When the election is made, the basis under §1014(a) follows the alternate value.

Community Property

Under §1014(b)(6), the surviving spouse’s half of community property is treated as acquired from the decedent, provided at least half of the whole community interest was included in the decedent’s gross estate. In community property states, both halves can therefore take a new basis at the first death.

What the Rule Excludes

• Income in respect of a decedent. §1014(c) excludes rights to income in respect of a decedent under §691.
• Property returned to the donor. Under §1014(e), if the decedent received appreciated property as a gift within one year of death and it passes back to the donor or the donor’s spouse, the donor takes the decedent’s adjusted basis, not the date-of-death value.

Basis Consistency

Under §1014(f), for property whose inclusion in the estate increased the estate tax, the heir’s basis cannot exceed the value finally determined for estate tax purposes. Executors who must file an estate tax return report those values to the IRS and to beneficiaries under §6035, on Form 8971.

What the Rules Ask of Art

For publicly traded securities, the date-of-death value is a matter of record. For art and collectibles, it is an opinion. It rests on the object, its condition, its provenance and comparable sales, and it has to be documented.

The Appraisal Requirement

Treasury Regulation §20.2031-6(b) applies to household and personal effects. If articles of marked artistic or intrinsic value (the regulation’s examples include jewelry, paintings, antiques and coin or stamp collections) total more than $3,000, an appraisal by an expert or experts, under oath, must be filed with the estate tax return. The executor also files a statement, under penalties of perjury, that the list is complete and that the appraiser is disinterested and qualified.

IRS Review of Art Valuations

The IRS has its own appraisers, in Art Appraisal Services. When a return under audit includes an appraisal of a single work of art valued at $50,000 or more, the examiner must refer the case to Art Appraisal Services, unless an exception applies (IRS Publication 5392). According to the IRS Art Appraisal Services page, the works it sends on to the Art Advisory Panel, a panel of up to 25 art experts, generally have individual values above $150,000. The Panel reviews them without knowing the taxpayer or the tax purpose of the value. The same page describes a Statement of Value that can be requested for estate transfers, generally for art appraised at $50,000 or more.

Appraisal Standards

The Uniform Standards of Professional Appraisal Practice (USPAP) are published by the Appraisal Standards Board of The Appraisal Foundation. Standards 7 and 8 cover the development and reporting of personal property appraisals, including art and collectibles.

Dividing the Collection

A new basis does not decide who receives what. A painting cannot be split between three heirs. Values on paper may be equal while the attachment to particular pieces is not. Disagreements over tangible property can slow the settlement of an estate and add to its cost.

Estates commonly use one of these approaches:

• Rotational selection: beneficiaries take turns choosing items in a set order.
• Value-based allocation: items are assigned with cash equalization so that totals match.
• Sale: items are sold and the proceeds divided.
• Combination: specific items go to named beneficiaries, and the rest are allocated by one of the methods above.

Whatever the method, beneficiaries should be able to see how each appraisal was obtained and how each value was assigned.

The Records an Estate Needs

You cannot value what you cannot identify. Records assembled during the collector’s lifetime are easier to complete than records reconstructed after death. For each work, the catalog should hold:

• A description: artist or maker, title, date, medium and dimensions
• Acquisition information: date, source and price, where known
• Provenance documents
• Condition notes
• Photographs
• Location

Title can catalog a collection to this standard and keep the record current. When the estate needs a value, we coordinate a qualified appraiser’s report and review it for USPAP compliance. The estate’s attorney and tax advisor decide how the values are used.

Not Tax Advice

This note is not tax advice. The summaries above are our own wording, with links to the law. Title does not calculate tax, classify property or advise on estate plans.

To talk about the records for a collection, write to [email protected].