Inherited Property Basis Rules for Stock and Other Assets

What happens when you inherit stocks or other property?

 A special provision of the tax code, known as step-up in basis, applies to appreciated taxable assets at death.

 

Step-up in Basis at Death

Under IRC § 1014(a) the general rule applied to property a beneficiary receives from a benefactor is that the beneficiary’s basis equals the fair market value of the property at the time the decedent dies. The fair market value basis rules (also known as the “step-up and step-down” rules), the heir receives a basis in inherited property equal to its date of death value. The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax.

 

Who gets a step up in basis at death?

The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

 

Step-down in Basis at Death

Under § 1014(a), if a decedent’s adjusted basis in property is higher than the fair market value, the beneficiary’s basis will equal the fair market value of the property at the time the decedent dies.A “step-down,” instead of a “step-up,” occurs if a decedent dies owning property that has declined in value. In that case the basis is lowered to the date of death value.  The best idea for property which has declined in value, therefore, is for the owner to sell it before death so he can enjoy the tax benefits of the loss.

 

§ 2032 Election for Alternate Valuation

Section 2032 provides an alternate method of determining the property’s new basis. If the property is not disposed of within six months of the decedent’s death, the executor may elect to use the property’s fair market value six months after the date of death. If the executor does not so elect, or if the property is disposed of before the six months have passed, then the property will still assume a basis equal to its fair market value at the time of death.