Under the general rule, the basis of the decedent’s property equals the value of the property as of the decedent’s date of death. Income of respect of decedent (IRD) property does not receive any basis step-up. IRD is the income received after the decedent’s death. It is income the taxpayer earns before death, but is not included on the decedent’s final income tax return because the taxpayer was not eligible to collect income before death.
Whether unharvested crops are considered IRD depends on whether 1) the decedent was an operating farmer or a materially participating landlord, or 2) if the decedent was a non-materially participating landlord.
Operating farmers and materially participating landlords: For operating farmers (including the materially participating farm landlord) growing crops and grain inventories are not IRD. Those assets are included in the decedent’s gross estate and receive a basis equal to their fair market value (FMV) as of the decedent’s death. No allocation is made between the decedent’s estate and the decedent’s final income tax return. All of the growing costs incurred by the farmer before death are deductible on the decedent’s income tax return. At the time of death, the fair market value of the growing crop is capitalized as inventory and deducted as sold. The remaining costs incurred after death are also deducted by the decedent’s estate.
FMV of growing crop = (sale price - costs after DOD)(days in growing period up to DOD /total days in growing period)
Non-materially participating landlords: If a cash-basis landlord rents out land under a non-materially participation lease, a portion of growing crops or crop shares that will be sold post-death will be IRD and a portion will be post-death ordinary income to the landlord’s estate. That is the result if the crop share is received by the landlord before death, but is not reduced to cash until after death. It is also the result if the decedent had the right to receive the crop share, and the share is delivered to the landlord’s estate and then reduced to cash. An allocation is made with the portion of the proceeds allocable to the pre-death being IRD in accordance with the allocation formula set forth in Rev. Rul. 64-289. This formula splits out the IRD and the estate income based on the number of days in the rental period before and after death. In these situations, IRD is not incurred until the crop share is sold. If the landlord received the crop share and sold before death, the income realized is included on the landlord’s final return and is not IRD.
If the landlord dies while in possession of crops which were received as rent by the landlord who uses the cash method of accounting, the stored crops as well as crop shares for an unharvested crop are IRD. For growing crops, the only portion that is IRD is that portion attributable to the rental period ending with the date of death. The proceeds attributable to the portion of crop share which runs from the next day through the end of the rent period are ordinary income to the estate has crop share rent.
If the estate sells grain inventory within six months after death, the income from the sale is treated as long-term capital gain if the basis in the crops was determined by the date of death fair market value rule and not IRD.
Expenses attributable to IRD items are deducted as an expense on Schedule K of federal estate tax return and are deducted as an expense item on the income tax return of the person or estate when the expense item is paid.