Broker Check

Cost Basis for Inherited Stock

Howard Hook, CFP®, CPA Quoted in The Times of Trenton's business column, "Biz Brain," May 2, 2012

Question: I have a pretty good understanding of the stepped-up cost basis of inherited stock. However, what do you do when the cost basis gets stepped down? My mother passed away and left me some stock. She had purchased AIG stock years back for $6,000, and on her date of death, it was worth $1,000. Now it is worth $2,000. If I sell now, must I use the stepped-up (really down) cost basis or can I use her original cost basis? --GK

Answer: Unfortunately for your tax bill, there is no stepping down. It is called stepped up because, generally speaking, assets held a long time appreciate in value and thus the value is “stepped up” at death, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton. “You cannot use her original cost basis as your basis in the stock and you must use the date of death value,” Hook said.

Hook said one advantage is that by inheriting the stock, your holding period is automatically considered to be long term, no matter how long your mom held the stock. In your case, it appears your mom held it for a few years anyway, Hook said, so this may not be of any additional help to you.

This all means that if you sell the stock for $2,000, you will pay long-term capital-gains tax on $1,000 of gain. Depending upon your marginal tax bracket in 2012 when the stock is sold, you would pay a maximum of $150 federal capital gains tax on the sale, he said. “The stepped-up basis rules requires an executor to value a decedent's assets at the fair market value at the date of death, or in some cases six months after date of death, for purposes of imposing an estate tax. For certain assets, the stepped-up basis also replaces the decedent's cost basis while they were alive. Presumably, this is so the heirs do not pay both income tax and estate tax on certain assets,” Hook said.

The valuation of assets after someone dies must be done in accordance with Internal Revenue Service rules and regulations, said Robert Bacino of Insight Financial Services in Flemington. “Those rules do not reference stepped up cost basis, or for that matter, stepped-down cost basis, but simply refer to the value of the asset as of the decedent's date of death. There are exceptions to this rule, but those exceptions have to do with the consequences of gifting appreciated assets within a certain period of time before the death of the decedent,” he said.

Check with your tax adviser to make sure you understand the tax consequences of any sale.