"Double Step Up" for Inherited Property of Registered Domestic Partners

Summary: This blog is aimed at taxpayers and tax professionals dealing with the unsettled question, does the surviving partner of a Registered Domestic Partner get a “double step up” in basis of an appreciated asset that had been titled as Community Property, with Rights of Survivorship that passed to the survivor at the pre-deceased partner’s death? There is no clear answer. Applicable tax code, regulations and guidance clearly refer to married people and spouses and even today, the IRS clearly and expressly does not consider Registered Domestic Partners married, which would lead to the conclusion of no double step up in basis. Conversely, IRS guidance unequivocally states it respects the Community Property law of the applicable state, leading to at least an inference that a surviving RDP could benefit from a double step up. More in the weeds of the tax code, at law and according to the applicable estate tax code, the community property is “valued” in the gross estate as the total fair market value of the property, and later “adjusted” by 50% to account for the community interest.

What is basis and why is it important?

One of the major goals of estate planning is to lawfully create as high a basis as possible for assets, especially assets that have increased in value since being acquired, because, generally, the higher the basis, the lower the gain, and the less income tax is owed.

The term basis means the input into the computation used to compute gain for purposes of income tax. The basic computation for gain is

Sales Price minus Basis [Adjusted] Equals Gain;

(Sales Price) - (Basis [Adjusted]) =Gain

So, the reason why basis is important is because the basis is a primary determinant of gain, which determines the amount of tax owed.

Explaining how basis can change

Generally, the basis of an asset is the price that was paid to acquire it.

However, the basis of an asset can change. For example, improvements on real property are subject to depreciation. Depreciation a deduction for tax purposes that is computed by rule and has nothing to do with any actual cost or expenditure. For real property that could have been depreciated, the basis is reduced each year by the legally correct amount of deduction. The new basis is called the adjusted basis.

Another example is when property is transferred at death. The general rule is that when property is transferred at death, the basis of property in the hands of the recipient is equal to the fair market value of the property as of the date of death.

computation

What is included in the value of the gross estate is the entire value of the estate. IRC section

2040⁠

, instructions 706.

In Schedule E of Form 706, line (b) one half of Joint Property [1/2 of line 1A, jointly held property, in section 1]. Part Five, on page three of 706, under Recapitulation, all the Exclusions to the gross estate,

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