IRS Form 8939: Basis Increases, Beneficiary Statement & Penalties

IRS Form 8939 filing requirements apply to the executor of an estate of someone who died in 2010, and only to that executor. The form, titled “Allocation of Increase in Basis for Property Acquired From a Decedent,” is used to elect out of the federal estate tax in favor of the modified carryover basis system under Internal Revenue Code Section 1022, to report the decedent’s property, and to allocate up to $1.3 million in general basis increases (plus an additional $3 million for property passing to a surviving spouse) across eligible assets. The original filing deadline was November 15, 2011, and no automatic extensions were granted.

Who Files and When

Only the executor of a 2010 decedent’s estate can file Form 8939. The IRS reads “executor” broadly. When a court has appointed a personal representative or administrator, that person files, and the IRS will generally accept the form only from them. If no one has been formally appointed and is acting inside the United States, any person in actual or constructive possession of the decedent’s property qualifies. The IRS can also direct specific individuals to file when the executor cannot report complete information about certain property.¹

Beneficiaries do not file Form 8939. Their role comes after filing, when the executor is required to send them a written basis statement.

The deadline was November 15, 2011. A form filed before that date could be amended or revoked by filing a superseding Form 8939 on or before the same deadline; the IRS treated the last version filed by November 15, 2011 as the operative return.²

Two narrow relief paths existed after that. Under Treasury Regulation Section 301.9100-2(b), an executor could file an amended Form 8939 by May 15, 2012 for any purpose except making or revoking the Section 1022 election itself. Beyond that, an executor must request relief under Section 301.9100-3, showing that the executor acted reasonably and in good faith and that granting the extension would not prejudice the government’s interests. The IRS has sole discretion over whether to grant it.²

Without a timely (or successfully late-filed) Form 8939, the Section 1022 election was never made, and the estate falls under the regular estate tax regime with stepped-up basis.

What Property Goes on the Form

If the executor makes the Section 1022 election, Form 8939 must include all property acquired from the decedent, with two exceptions: cash and income in respect of a decedent (IRD). IRD items are amounts the decedent had a right to receive before death but that had not yet been included in income, such as unpaid salary, retirement account distributions, or installment sale payments. They keep their character as ordinary income to the recipient and are never eligible for a basis increase.²

The executor must also report any appreciated property the decedent acquired by gift during the three years before death, if that property was required to be included on the donor’s gift tax return. This reporting requirement stands even if the property is not eligible for a basis increase.²

Certain property requires a formal appraisal of fair market value to be attached to the form.³

Which Property Can Receive a Basis Increase

Reporting a property and increasing its basis are separate questions. To receive a basis increase, an asset must have been owned by and acquired from the decedent. Several categories are excluded even when that test is met:

Property the decedent acquired by gift during the three years before death, unless the gift came from the decedent’s spouse and the spouse did not themselves acquire the property by gift during that same three-year window.⁴
Property over which the decedent held a general or specific power of appointment. It must still be reported, but no increase can be allocated.
Stock in a foreign personal holding company, a domestic international sales corporation (DISC) or former DISC, a foreign investment company, or a passive foreign investment company (unless the decedent had made a qualified electing fund election).⁴

One ceiling runs through the entire allocation: the basis increase allocated to any single property cannot push its basis above the fair market value at the date of death. If real estate had a $200,000 basis and a $500,000 death-date value, the most that property can absorb is $300,000, no matter how much aggregate increase is left over.

In community property states, the surviving spouse’s one-half share of community property can be treated as owned by and acquired from the decedent, making it eligible for a basis increase, provided at least one-half of the entire community interest is treated as owned by the decedent under applicable state law.¹

Property worth less than the decedent’s basis at death takes a basis equal to fair market value, not the higher carryover basis. Because the starting basis is already capped at FMV, no basis increase can be allocated to built-in loss property.

The $1.3 Million General Basis Increase

The general basis increase starts at $1.3 million for a U.S. citizen or resident decedent. For a decedent who was neither a U.S. resident nor a U.S. citizen, the amount is $60,000 with no adjustments.⁴

For a U.S. citizen or resident, the $1.3 million base is increased by three amounts:

Capital losses under Section 1212(b) that, but for the decedent’s death, would have carried forward.
Net operating losses under Section 172 that would have carried forward.
Losses that would have been deductible under Section 165 had all the decedent’s property been sold at fair market value immediately before death.

These figures go on lines 10 through 12 of Part II, with the $1.3 million (or $60,000) on line 12b and the total available general basis increase on line 12c.⁵

Allocation across eligible assets happens on Schedule A, property by property, in column (e)(i), and is at the executor’s discretion subject to the per-asset FMV ceiling.

The $3 Million Spousal Basis Increase

If the decedent was survived by a spouse, the executor can allocate an additional $3 million, but only to “qualified spousal property.” That category covers property transferred outright to the surviving spouse and qualified terminable interest property (QTIP).⁴

The spousal increase is allocated in column (e)(ii) of Schedule A. The FMV ceiling still governs: the combined general and spousal increases for a single property cannot push its basis above the death-date fair market value.⁵

If the executor allocates spousal basis increase to property sold before distribution to the surviving spouse, the executor must certify on Schedule A that all net sale proceeds will be distributed to or for the benefit of the surviving spouse in a way that would qualify the property as qualified spousal property.⁵

Filling Out the Form

Form 8939 has two main components: the face of the form (Parts I and II) and Schedule A.

Parts I and II

Part I collects identifying information about the decedent and the executor: names, addresses, Social Security numbers, and the date of death. Part II calculates the general basis increase using the carryover and unrealized loss adjustments described above, ending at the total on line 12c. Lines 13 and 14 are control totals: line 13 shows the total general basis increase allocated across all Schedule A entries, and line 14 shows the total spousal property basis increase allocated. Both must reconcile with the Schedule A allocations and stay within the available limits.⁵

Schedule A

Each asset gets its own line. For each property, the executor reports:

A description of the property.
The name of the beneficiary receiving it.
The decedent’s adjusted basis (column d).
The fair market value at the date of death (column c).
The general basis increase allocated to that property (column e(i)).
The spousal property basis increase, if applicable (column e(ii)).

For each line, the sum of columns (e)(i) and (e)(ii) cannot exceed the difference between fair market value and the decedent’s adjusted basis. If the executor cannot supply complete information for a particular property, the form must still include a description of that property and the name of every person with a legal or beneficial interest in it.¹

The 30-Day Beneficiary Statement

Within 30 days after filing Form 8939, the executor must send a written statement to every person who received property reported on the form. This obligation covers all reported property, not just assets that received a basis increase. The statement must include the property’s basis, when the decedent acquired it, whether any gain on its sale would be ordinary income, the amount of basis increase allocated to it, and the fair market value at the date of death.²

If the IRS later adjusts the basis of any reported property, the executor must send updated statements to the affected beneficiaries within 30 days of making the adjustment or receiving notice from the IRS.²

Beneficiaries should keep these statements indefinitely. The basis on the statement determines the gain or loss reported when the inherited property is eventually sold, and the burden of proving basis in an audit rests with the taxpayer.

Penalties and the Real Cost of Getting It Wrong

Form 8939 is an information return, and it sits outside the standard failure-to-file penalty framework that applies to income tax returns. The biggest exposure is not a penalty at all: it is losing the Section 1022 election. Without a timely form, the estate defaults to the regular estate tax with stepped-up basis, and any planning that assumed the carryover regime is gone.

For beneficiaries, using an incorrect basis derived from a poorly prepared Form 8939 can trigger accuracy-related penalties of 20% on any resulting tax underpayment.⁶

The most common practical problem is a basis dispute years later. If a beneficiary reports a basis increase on a property sale but the executor never properly allocated that increase on Form 8939, the IRS can deny the increase and recompute the gain, producing a larger capital gains bill plus interest running from the original due date of the beneficiary’s return.

1
Internal Revenue Service. 2010 Instructions for Form 8939
2
Internal Revenue Service. IRS Notice 2011-66 – Section 1022 Election and Filing Requirements
3
Internal Revenue Service. Revenue Procedure 2011-41
4
Justia Law. 26 U.S. Code 1022 – Treatment of Property Acquired From a Decedent Dying After December 31, 2009
5
Internal Revenue Service. Form 8939 – Allocation of Increase in Basis for Property Acquired From a Decedent (2010)
6
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments