Getting a stepped-up cost basis on inherited assets allows you to save taxes when the asset is later sold.
For instance, if your father bought a stock at $10 per share, and it’s now worth $100 per share, if he sells that stock while he’s alive, he’ll owe the IRS a capital gains tax on the $90 per share the stock has appreciated. If your father doesn’t sell the stock, and instead gives you the stock before he dies, his gift to you will be valued at $100 per share for gift tax purposes, but you’ll take his cost basis of $10 per share. If you later sell the stock, you’ll owe a capital gains tax on the difference between the price you receive when you sell it and your $10 per share cost basis.
If your father waits to give you the stock until after his death, the stock will be valued in his estate at $100 per share, and you’ll have a new cost basis of $100 per share. Your father’s $10 cost basis gets “stepped-up” to $100 as a result of his death. This is true even if your father’s estate isn’t required to file a federal estate tax return. When you later sell the stock, you’ll only owe capital gains taxes if the value of the stock is higher than $100 per share.
There are two exceptions worth noting. First, after your father’s death, if his estate owes estate taxes, it may be possible to value the stock based on the market price on the day six months following his date of death. If the stock is worth less at that time, you can use this lower value as a way to pay less estate taxes. But if you do, the basis in the stock is also the lower value–not the higher date of death value. Additionally, this “alternate valuation date” method for valuing estate assets has several strings attached and must be applied to ALL estate assets.
Second, if you own $20,000 worth of stock that you purchased for $1,000 years ago, you may be hesitant to sell the stock because you don’t want to pay capital gains taxes. Your idea may be to give the stock to your father, who is very ill and near death, and then have him leave it to you when he dies, thereby getting a stepped-up cost basis. As you might expect, the IRS doesn’t like this, and there is a rule which says if your father dies within one year of being given your stock, then you receive the stock with your old cost basis. If your father survives for more than a year, then you would get the stepped-up cost basis.
This stepped-up cost basis doesn’t apply just to stocks – it applies to real estate, artwork, and other appreciating assets, too.
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Ready to make sure everything’s in order for your loved ones in the event you become incapacitated or die? Give Manasota Elder Law a call at 941-444-5958. We’ll help you determine whether you’re all set, or whether there are still some things that need to be done to protect what’s most important to you … your family.