What is the Tax Basis for Inherited Stocks?

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The value of property is constantly fluctuating. In order to figure taxes on an item that has a fluctuating value, the tax concept of basis comes into play. This creates a fixed point from which one can determine whether there is a gain or loss in value. Bases change depending on various taxable situations as well.

What is Tax Basis?

  • A tax basis is the amount or deemed amount of investment in property that is used to determine certain tax calculations when there is a taxable event regarding the property. The tax calculations that depend on a basis are depreciation, amortization or any gains or losses from a sale or other disposition of the property, among other tax calculations.

Types of Basis

  • There are several types of tax bases for property. The most common is the cost of the item purchased; this is called the cost basis. Adjusted basis occurs when you start with one basis, such as cost basis, and must adjust the basis due to the occurrence of certain things, such as improvements, legal fees or zoning costs. The other bases depend on how you receive the property. The difference in these bases is how you calculate it. If you received property for services, you have to include the property's fair market value in your income; this is the basis. Inheriting property creates another type of basis.

Inherited Basis

  • If you inherit property, then the basis of the property will be one of the following depending on the nature of the property you inherit: the fair market value of the property at the date of death (this is called a step-up in basis) or the fair market value on the alternate valuation date if the estate selects this method. If you inherit farming property and you elect to do so, you may use the value under a special-use valuation method. Additionally, if you inherit any qualified conservation easements, there is a special tax treatment that requires excluding the value of the easement. For additional information about qualified conservation easements, you should refer to IRS Form 706. If the estate is so small that a return is not required, your inherited property will have a basis equal to the appraised value at the date of death for the state inheritance or transmission taxes.

Inherited Basis Applied to Stocks

  • Since stock has a readily available fair market value on the date of the death of the decedent, your basis in inherited stocks will be equal to the fair market value of the stock on the decedent's date of death. This means that if you sell the stock after inheriting it, you will get to use the step up basis to determine whether you have a gain or loss for purposes of your income taxes. For example, if the decedent had purchased Google stock on the date of its IPO on Aug. 19, 2004, the decedent would have paid $192.79 per share. If the decedent died on Jan. 9, 2011, and left you the stock, the share of Google you inherit is now worth $626.77. Accordingly, if you sell the stock your basis will be $626.77, rather than the cost basis of $192.79 that the decedent would have had.

References

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