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643(e)(3) Election

  • Treatment of Property Distributed In-Kind, IRC Section 643(e)—The distribution of appreciated (or depreciated) property can result in a gain (or loss) to an estate or trust only if an election is made to recognize that gain (or loss).21 IRC Section 643(e) governs all non-cash distributions. A primary benefit of utilizing this election is it offsets an estate’s excess capital losses in a given tax year.

If this election is made, the gain or loss will be recognized by the estate as if the property had been sold to the beneficiary at the property’s fair market value (FMV).22 Consequently, the beneficiary’s basis in that property will be the property’s FMV on the date of distribution.23 In addition, the estate will be allowed a distribution deduction equal to the FMV of the property distributed.24

If the election is not made, the beneficiary’s basis in the property distributed will be the same as the estate’s basis. Consequently, the recognition of gain or loss will be deferred until the beneficiary sells the property. In addition, the distribution will carry out DNI only to the extent of the lesser of the property’s adjusted basis or its FMV (to the extent of the beneficiary’s share of DNI from the estate).25

The personal representative must make the election on the income tax return for the taxable year in which the distribution is made. Once made, the election is irrevocable26 and applies to all distributions made by the personal representative during the taxable year. As a planning tip, please remember that regardless of whether this election is made, the personal representative should provide the beneficiaries with the cost basis of all property distributed in kind.

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