If you inherited stock, the cost basis will depend on when you inherited it and who you inherited it from.
In general, if you inherit it before 1/1/2010, the cost basis is "stepped up" from the original cost paid by the deceased owner to the fair market value on the date it was bequeathed to you. See special rules for joint accounts, trust distributions, and inheritances after 12/31/2009, all of which are discussed below.
C A U T I O N Changes in estate tax law are under discussion. Check back for revisions to this information in case any legislation is enacted.
INHERITANCES BEFORE 2010:
Your cost basis is determined by the value declared on the estate tax return (if one was filed.) The value declared on the estate tax return will either be the fair market value per share on the date of death, or the market value six months later if the alternate valuation date is elected by the executor. Check with the executor to be sure. Get a copy of the estate tax return or a letter from the executor stating your cost per share so that you will have proof if you are audited by the IRS.
If no estate tax return was filed, use the fair market value on the date of death of the person from whom you inherited the shares. The fair market value is calculated as the average of the high and low trading prices for the date of death. If the date falls on a weekend, use the average of the Friday and Monday average trading prices.
OK, what if the executor has died and you have no idea where the estate tax return is? If you at least know the date of death, you can look up the trading ranges for that day using historical stock price resources such as BIG CHARTS. (Hint: When you use the historical stock price function at Big Charts, if the stock is no longer actively trading under the stock symbol, you can try using the CUSIP number. If that does not work, ask your broker/dealer to look up the historical price by CUSIP on Bloomberg, Interactive Data, or other databases available to the brokerage community.) A large library will also often be able to provide historical prices from their archive of stock listings in daily newspapers.
Once you determine the initial cost basis per share of the stock you inherited, you then cycle back to look at corporate actions, reorganizations, and return of capital payments since the date you received the shares.
INHERITANCES DURING 2010
The stepup rules described above are no longer in effect after 12/31/2009. Unless Congress acts retroactively to amend the tax code as of 1/1/2010, the following rules will apply:
(1) No estate tax will apply in calendar year 2010. (2) A new carryover basis rule goes into effect where the inherited security will be valued at the lower of the cost basis to the decedent or the market value on the date of death. (Note how the IRS will not allow tax savings from capital losses.) (3) The executor is allowed to allocate $1.3 million in basis adjustments (meaning step-up to market value) to the assets in the estate. (4) The executor is also allowed to allocate up to $3 million to increase the basis of assets that are received by the surviving spouse. (5) The rest of the assets will retain a carryover basis. This means you have to figure out the decedent's cost basis--an accounting nightmare.
Consult the executor of the estate to determine how the basis adjustment allowance was apportioned to the assets you inherited from the estate.
JOINT ACCOUNTS BEFORE 2010:
If the stock was held in a joint account or joint registration with your spouse, one-half of the stock would get a stepup at the date of death, unless you live in a community property state. If you do live in one of the nine community property states (see http://en.wikipedia.org/wiki/Community_property) the entire account gets a stepup to market value at the date of death, not just one-half.
If the stock was held in a joint account with someone NOT your spouse, the stepup to fair market value at the date of death applies only to the portion of the joint property contributed by the decedent (the person who died.)
JOINT ACCOUNTS DURING 2010:
See the rule above for the $3,000,000 limit on the stepup available for assets left to a surviving spouse, including through joint tenancy.
ADJUSTMENTS AFTER DATE OF DEATH:
Once you have determined the initial cost basis per share of the stock you inherited, you then must cycle back to look at corporate actions, reorganizations, splits, return of principal payments, etc. since the date you inherited the shares.
HOLDING PERIOD:
Your holding period is always long-term for stock that you inherit. Thus, you are eligible for long-term capital gains treatment even if you sell the stock immediately after you receive it.
INHERITANCES RECEIVED AS A DISTRIBUTION FROM A TRUST:
Please see detailed discussion of Trust Distributions on a separate page of this website.
