Verify Step-up in Cost Basis for Inherited Investments

| April 01, 2019
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Cost basis is what you pay for an investment, and your taxable capital gain (or loss) when you sell that investment will be the difference between the cost basis and the price at which you sell your securities.

When you inherit investment assets like stocks from a non-retirement account, you get a special tax break called a step-up in cost basis. The cost basis for inherited stock is its value on the date of the owner’s death. If the stock is worth more than what the owner originally paid for it, the cost basis is stepped-up to the value at death, and this becomes your new cost basis.

For example, say your father paid $20,000 for ABC stock, and when he dies, it’s worth $40,000 and you inherit the stock. Now in the eyes of the IRS, your basis would then be the date of death value of $40,000, not the $20,000 he originally paid. If you sell it, you would not be taxed on the $40,000. This could save you a bundle in taxes - as long as you make sure you use the new stepped-up cost basis.

When we meet with new people, we often find cost basis errors on statements from inherited investments. This is because the step-up in cost basis has to be manually entered by a client’s advisor, and it rarely gets done unless the client requests it. If you recently had an investment portfolio retitled into your name, either from a deceased spouse, or someone else who passed away, we strongly recommend that you verify that the basis was updated properly.

We had a widow come in from one of our workshops with this issue. Her cost basis from her deceased husband’s accounts had never been updated to the date of death value. On her statement, her cost basis was still listed as the original purchase price.

If she later had sold those investments without updating her basis, a 1099 would have gone to the IRS and her CPA showing she had a lot more taxable gain than she really had, and she would have paid thousands of dollars in unnecessary taxes.

 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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