Long embedded in the federal tax code is a provision that provides important advantages for people who sell inherited stocks, real estate or other investments that have appreciated in value.
Internal Revenue Code Section 1014 authorizes tax breaks for inheritors. In tax lingo, the basis (the starting point for measuring gain or loss) of inherited assets “steps up” from their original basis (cost, in most instances) to their date-of-death value. It’s as if the inheritors had bought the assets that day.
There’s a limited exception for executors of estates. They’re allowed to use an alternative valuation date for inherited assets — six months after the date of death.
Put another way, inheritors of, say, shares of stocks sidestep taxes on their increase in value while they were owned by the person who bequeathed them.
An example: Assume that your aunt left you shares of an airline. She paid $10,000 for the airline’s shares that were worth $250,000 at her death. Subsequently, you unload them for $300,000.
How does a stepped-up basis benefit you? Your basis for the shares automatically increases from $10,000 to $250,000, their market value at the date of her death. A basis of $250,000 for the shares shrinks your taxable profit to just $50,000 — their increase in value between the time your aunt died and the time you sell them for $300,000.
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About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.