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Inherited Business Inventory

Level 3

Son inherited his father's pawn shop in 2022.

The business ran for 8 months in the "Estate of..." then transferred to the son.

Can step-up basis be used on the inventory? For both the estate return and son's personal return?

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5 Comments 5
Level 15

Off the top of my head, I was going to say no.  But Section 1014 covers "all property."  So I think you may have a valuation issue.  Do you use what the shop paid for it?  Or do you use what it sells for?  And what is the value of a Rolex that the shop doesn't own until the ticket is not redeemed?  

Level 15

"what is the value of a Rolex that the shop doesn't own"

Yep, that's the difference between Pawn and Secondhand. It's not your inventory if it's pawned or on consignment.

"Level Up" is a gaming function, not a real life function.
Level 15

I say yes the estate gets inventory stepped up or down to FMV. 

Was an appraisal done?

When estate transfers business to son, son gets inventory, and everything else at it's carrying value on that day.

Level 3

Thanks for the replies.

I got the appraisal packet dropped off for review. Unfortunately, the appraisal was for the building only and not for the HUGE inventory.

Son is 24 and didn't know to do inventory at the end of 2022. Nor did anyone after dad passed away.

To top it off, the record keeping is on paper and inadequate...

I feel like FMV of used items is what they are sold for. So only new purchases (& pawn forfeits) would have a possible profit for the year. 

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Level 15

@lrhenry04 wrote:

I feel like FMV of used items is what they are sold for. 

You would probably feel differently if you were preparing an estate tax return. 

If the business closed its doors and sold everything at one time, at auction or for quick-sale fixed price, I would feel comfortable using sales price.  But apparently the business has some value as a going concern, which means the son inherited blue sky that had not been purchased, and inventory that wasn't worth retail until it sold for that value, six weeks or six months later. 

It's unlikely your method would not be challenged in an audit, but it's even more unlikely that an audit will occur.   

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