In-Kind Distributions
from Trusts & Estates
You received property from a trust or estate: stock, real estate, a business interest, or something else. Your basis in that property determines how much tax you will owe when you sell. It depends on where the property came from and how the distribution was handled.
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You got property, not cash
When a trust or estate distributes assets to beneficiaries, it does not always sell everything first. Sometimes the trustee or executor distributes the property itself: shares of stock, a piece of real estate, an interest in a business, personal property. You receive the asset directly instead of receiving cash from a sale.
Receiving the property is not a taxable event. You do not owe income tax just because property was transferred to you. But two important questions follow: what is your basis in the property, and what happens when you sell it?
Property from an estate
If the property came from an estate (someone who recently passed away), the news is usually good. Most estate assets receive a stepped-up basis equal to the fair market value at the date of death. When the estate distributes that property to you, you generally take that same stepped-up basis.
This means if you sell shortly after receiving it, the gain is usually small (only the change in value since the date of death). If the property has not moved much in value, you may owe little or no tax.
There is one situation where this works differently. If the will directed that you receive a specific dollar amount (for example, "$100,000 to my nephew") and the executor used appreciated property to satisfy that bequest, the estate may have recognized gain on the distribution. In that case, your basis is the fair market value at the time of distribution, not the date-of-death value. The estate’s tax preparer can confirm which situation applies.
Property from a trust
Property distributed from an ongoing trust (not an estate) can be different. A trust may have held the property for years or even decades. Unlike an estate, where most assets get a stepped-up basis at death, a trust’s basis in its assets may be whatever it originally paid for them.
Under the default rule, you receive the same basis the trust had. If the trust purchased stock for $20,000 years ago and distributes it to you when it is worth $150,000, your basis is $20,000. If you sell, you owe tax on $130,000 of gain.
Sometimes the trustee makes an election to recognize the gain at the trust level instead. When that happens, you receive the property with a basis equal to its current fair market value, and the trust pays the tax on the gain. Whether this election was made will be reflected on the trust’s return and your K-1.
The K-1 and income from the distribution
Even though receiving property is not itself taxable, the distribution may still generate income on your K-1. When a trust or estate distributes property, it uses some of the entity’s distributable net income (DNI). That income flows through to you on Schedule K-1 and is reported on your individual return.
The amount of income on your K-1 from an in-kind distribution depends on the property’s basis relative to its value and whether the gain-recognition election was made. If the property’s basis is low and no election was made, the income that flows to you through DNI may be limited to the basis amount. If the election was made, the full fair market value flows through.
This is separate from any gain you owe when you eventually sell the property. The K-1 income is about the distribution itself. The gain on sale is about what happens when you dispose of the property later.
Planning before you sell
If you received property from a trust or estate and plan to sell it, the most important step is confirming your basis before the sale. The wrong basis means the wrong amount of gain on your return, which can lead to overpaying taxes or to an IRS notice.
For estate property, the basis is usually documented on Form 8971 or in the estate’s records. For trust property, the trust’s tax preparer should be able to provide the basis and any adjustments. If the property is real estate, you also need to account for any improvements, depreciation, or other adjustments made while the entity held it.
We coordinate with the estate or trust’s preparer to confirm your basis, holding period, and the character of any gain before the property is sold or reported on your return.
What we handle
- Determining your basis in property received from a trust or estate
- Coordinating with the entity’s tax preparer to confirm basis, elections, and K-1 treatment
- Reporting the K-1 income from the distribution on your individual return
- Reporting the sale of distributed property on Schedule D with the correct basis and holding period
- Identifying whether the gain-recognition election was made and how it affects your basis
- Real estate basis adjustments for depreciation, improvements, and transfer costs
Frequently Asked Questions
I received property from a trust. What is my basis?
In most cases, you receive the same basis the trust had in the property. If the trust bought stock for $30,000 and it is worth $150,000 when you receive it, your basis is $30,000. If you sell, you owe tax on the $120,000 gain. There is an exception: if the trustee made an election to recognize gain on the distribution (which is sometimes done for tax planning reasons), your basis is the fair market value at the time of distribution. The trust’s tax return and your K-1 should reflect which approach was used.
I received property from an estate. Is my basis the date-of-death value?
Usually yes. Most estate assets receive a stepped-up basis equal to the fair market value at the date of death. When the estate distributes that property to you, you generally receive that stepped-up basis. If the property went up or down in value between the date of death and the date you received it, your basis is still typically the date-of-death value (unless the estate made an election or the distribution was used to satisfy a specific dollar bequest, which can change the rules).
Do I owe tax when I receive the property, or only when I sell it?
Receiving property from a trust or estate is not itself a taxable event to you. You do not owe income tax just because you received it. However, the distribution may carry out distributable net income (DNI) from the entity, which means you could owe tax on the income portion of the distribution as reported on your K-1. The property itself is not taxed until you sell it. When you do sell, you owe tax on the difference between your selling price and your basis.
How do I report property I received from a trust or estate on my tax return?
If the distribution carries out distributable net income, the income portion will be reported on a Schedule K-1 from the trust or estate. You report those K-1 amounts on your individual return in the appropriate places. The property itself is not reported on your return until you sell it or receive income from it (such as rent or dividends). When you sell, you report the sale on Schedule D, using the basis you received from the entity and the date you received the property as the start of your holding period (or the entity’s original holding period if it tacks).
Related services
Inherited Assets & Basis
Stepped-up basis, basis documentation, and the sale of property received from an estate.
Beneficiary K-1 Returns
The K-1 from the trust or estate that reports the income portion of your distribution.
Investments & K-1s
Reporting the sale of distributed stock, partnership interests, and other investment property.