Income in respect of a decedent

Key takeaway

Income in respect of a decedent (IRD) is income the decedent was entitled to receive that, under the decedent’s accounting method, was not properly includible in income for the year of death or an earlier period.

How it works

Apply the decedent’s accounting method to decide whether income was properly includible for the taxable period in which the date of death falls or a prior period. Subject to that requirement and the decedent’s entitlement to the income, IRD includes accrued income of a decedent who reported on the cash method, income accrued solely because of death for a decedent who reported on the accrual method, and income to which the decedent had a contingent claim at death.

The estate includes IRD in gross income for the taxable year when received if the right to receive the amount is acquired by the estate from the decedent. A person who acquires the right by reason of the decedent’s death includes the amount in gross income for the taxable year when received. Section 1014 does not apply to property that constitutes a right to receive an item of IRD under section 691.

For the estate or a person acquiring the right because of death or by bequest, devise or inheritance, amounts includible under section 691(a)(1) or taxable transfers under section 691(a)(2) retain the character they would have had if the decedent had lived and received them. The right is treated as acquired in the transaction that originally produced it, so IRD is not automatically ordinary income.

Where IRD shows up

For a decedent who kept books on the cash method, the IRS lists deferred salary payable to the estate, uncollected interest on U.S. savings bonds and proceeds from a completed sale of farm produce. Applying the accrued income rule, an earned but unpaid consultant fee can also be IRD if the decedent was entitled to it, used the cash method and was not required to include it in the year of death or an earlier period.

A consultant’s earned but unpaid fee can be IRD if the decedent was entitled to the accrued fee, used the cash method and was not required to include the fee in the taxable period of death or an earlier period.
For a decedent who used the cash method, the IRS identifies an IRD component of a lump sum distribution to the beneficiary of the decedent’s IRA. The measure is the balance at the owner’s death, including unrealized appreciation and income accrued to that date, less the owner’s aggregate nondeductible contributions.
An installment obligation reportable by the decedent under the installment method in section 453 includes IRD equal to its face amount minus the decedent’s basis in the obligation, determined under section 453B, when it passes to the estate or another person because of death or by bequest, devise or inheritance.
Interest accrued on savings certificates redeemable after death without forfeiture of interest, from the last interest payment through the date of death and not received by then, is IRD if the decedent was entitled to receive it and, under the decedent’s accounting method, it was not properly includible for the year of death or an earlier period.

Points that are easy to confuse

Income is not IRD just because it is received after death. The decedent must have been entitled to receive the income, and under the decedent’s accounting method it must not have been properly includible for the year of death or an earlier period. Interest accrued after death that becomes payable on savings certificates after death is taxable income of the respective recipients and not IRD.

An unpaid invoice alone does not establish IRD. Entitlement and the accounting method requirements must both be applied.

Common questions

What is income in respect of a decedent?

IRD is income that a decedent was entitled to receive but that, under the decedent’s accounting method, was not properly includible in income for the year of death or an earlier period. Qualifying income can include accrued cash method income, income accruing solely because of death for an accrual method decedent, and income subject to a contingent claim at death.

Does income in respect of a decedent get a basis step up?

No, section 1014 does not apply to property that constitutes a right to receive an item of IRD under section 691. The exclusion applies to the right to receive income that, under the decedent’s accounting method, was not properly includible for the year of death or an earlier period.

Who reports income in respect of a decedent, and when?

The estate or person acquiring the right by reason of the decedent’s death reports IRD in gross income for the taxable year when received. The estate reports it if the estate acquired the right to receive the amount from the decedent.

Does income in respect of a decedent keep its character?

Yes, amounts includible under section 691(a)(1) or taxable transfers under section 691(a)(2) keep the character they would have had if the decedent had lived and received them. For the estate or a person acquiring the right because of death or by bequest, devise or inheritance, the right is treated as acquired in the transaction that originally produced it.

Can an unpaid consultant fee be income in respect of a decedent?

Yes, if the decedent was entitled to the accrued fee, used the cash method and was not required to include the fee in the taxable period of death or an earlier period. An unpaid invoice alone does not establish these conditions, so entitlement and the accounting method must both be applied.

Is part of an inherited IRA lump sum income in respect of a decedent?

Yes, for a decedent who used the cash method, the IRS identifies an IRD component of a lump sum distribution to the beneficiary of the decedent’s IRA equal to the balance at the owner’s death, including unrealized appreciation and income accrued to that date, less the owner’s aggregate nondeductible contributions. That measure does not treat the entire inherited account or all later growth as IRD.

Does an inherited installment obligation include income in respect of a decedent?

Yes, if the obligation was reportable by the decedent under the installment method in section 453 and passes to the estate or another person because of death or by bequest, devise or inheritance. The IRD equals the face amount minus the decedent’s basis in the obligation, with that basis determined under section 453B.

Can transferring a right to income in respect of a decedent trigger income?

Yes, when the estate or a person who acquired a right described in section 691(a)(1) because of death or by bequest, devise or inheritance transfers that right, the transferor includes in income for the transfer period the right’s fair market value plus any consideration that exceeds that value. A transfer includes a sale, an exchange, another disposition and the satisfaction of an installment obligation at other than face value. Transmission at death to the estate and transfers pursuant to a recipient’s right to receive the amount because of death or by bequest, devise or inheritance are excluded, subject to the special installment obligation rules below. For an installment obligation reportable by the decedent under section 453, the inclusion is reduced by the decedent’s basis determined under section 453B.

Does cancelling an installment obligation count as a transfer?

Yes, for an obligation reportable by the decedent under section 453, any cancellation is treated as a transfer, and an obligation that becomes unenforceable is treated as cancelled. Cancellation at death is treated as a transfer by the estate, or by another person who held the obligation before death. Passing the obligation to its obligor does not receive the inheritance transfer exclusion. For transfers subject to section 691(a)(2) because of these special rules, if the decedent and obligor were related under section 453(f)(1), the obligation’s fair market value cannot be below its face amount. The inclusion is reduced by the decedent’s basis in the obligation determined under section 453B.

Is income received after death always income in respect of a decedent?

No, receipt after death alone does not make income IRD. The decedent must have been entitled to receive the income, and under the decedent’s accounting method it must not have been properly includible for the year of death or an earlier period. For savings certificates redeemable after death without forfeiture of interest, interest accrued from the last interest payment through death and not received by death is IRD if those entitlement and accounting method requirements are met. Interest accrued after death that becomes payable on the certificates after death is taxable income of the respective recipients and not IRD.

Resources to check out

Guide: income tax basis and trust taxation: Explore related income tax topics.
Glossary: distributable net income: Read the definition of DNI.
Glossary: income distribution deduction: Read about the income distribution deduction.
Glossary: trust accounting income: Read the definition of trust accounting income.
Primary source: IRC §691: Read the statute on income in respect of a decedent.
Primary source: IRC §1014(c): Read the IRD exception to section 1014.
Primary source: IRS Form 1041 instructions: Review the IRS discussion and examples of IRD.
Primary source: IRS Publication 559: Review the IRS savings certificate interest example.