what is the cost basis for inherited stock

James

I recently inherited some stocks from a family member, and I'm trying to understand how to determine the cost basis for tax purposes. I know the cost basis is important when I decide to sell the stocks, but I'm not sure if it's based on the original purchase price or the value at the time of inheritance. Can someone clarify how this works and what factors might affect the cost basis?

John

The cost basis for inherited stock is generally the fair market value (FMV) of the stock on the date of the original owner's death. This is known as the "step-up in basis" rule. For example, if the stock was originally purchased for $50 per share but was worth $100 per share on the date of death, your cost basis would be $100. This step-up helps minimize capital gains taxes when you sell the inherited stock.

Michael

In most cases, the cost basis of inherited stock is reset to its value on the date of the decedent's death. However, if the estate chooses an alternate valuation date (six months after death), the basis could be the value on that later date. It's also important to note that if the stock was held in a joint account or gifted before death, different rules might apply. Consulting a tax professional can help ensure accuracy.

David

What happens if the stock value dropped after the date of death? Would the cost basis still be the higher value, or does it adjust downward?

Emily

David The cost basis remains the fair market value on the date of death, even if the stock's value later decreases. This means you could potentially have a capital loss if you sell it for less than the stepped-up basis, which might offset other gains.

William

Are there any exceptions where the step-up in basis doesn’t apply, like for certain types of accounts or trusts?

Sarah

William Yes, there are exceptions. For example, assets in certain irrevocable trusts or retirement accounts like IRAs may not receive a step-up in basis. Additionally, community property states might have different rules for jointly owned assets. It's best to review specific cases with a tax advisor.