Inheritance vs. gift – capital gains taxes
In this post I will be discussing the differences between receiving an inheritance and a gift. As I am neither an attorney nor a CPA, I will leave it up to the reader to determine which is a better choice in his or her situation.
Step-Up in Cost basis
When you inherit an asset such as real property (e.g., a house) or securities (e.g., stocks) you get what is called a “step-up in cost basis.” This comes into play when you must pay capital gains taxes. You pay capital gains taxes when you sell assets such as homes or stocks. The amount you pay taxes on is the difference between the amount you paid for the asset and the amount you are selling it for.
Capital Gains tax with gift
To illustrate capital gains taxes, let’s say your mother deeds you her house as a gift. She bought for $80,000 and then you decide to sell it years later when she passes away for $200,000. The capital gain would be: $200,000 – $80,000 = $120,000.
capital gains tax with inheritance
Now let’s say that instead of receiving it as a gift, you inherit the same house from your mother, and you’re planning on selling it for the same amount listed above. But this time, since it was inherited, you get a step-up in cost basis. You would hire an appraiser for a retrospective appraisal showing the value of the house as of your mother’s date of death. For this example, let’s say the date of death appraisal valued the house at $115,000. Now you’re looking at a capital gain of only: $200,000 – $195,000 = $5,000.
Other ways to adjust cost basis
It’s important to note that there may be other ways to adjust the cost basis of real property, such as improvements. There are also ways to exclude a certain amount of capital gains from taxation, such as using the house as your primary residence for a certain number of years. These would be items to discuss with your CPA.
Inherited Brokerage Accounts and stocks
As mentioned above, you also get a step-up in cost basis on inherited securities, such as stocks or shares. When you inherit a brokerage account or other accounts that contain securities, you will need to obtain the date of death value of each security in that account. This is trickier than determining the date of death value of a checking account since the stock market fluctuates daily. You can request that the financial institution provide you a date of death valuation for all the securities within the account you are inheriting. You may need this document when filing taxes. Here’s an article about inheriting stocks from Fidelity: Cost Basis for Inherited Stock.
There are numerous tax implications surrounding either gifting or inheriting assets, so it’s important that you consult with a tax professional, such as a CPA. Even if you hire an estate planning or probate attorney, he/she will most likely suggest that you consult with a CPA regarding taxes. Here is a link to the Arizona State Board of Accountancy where you can find licensed CPAs and see if they’ve had any disciplinary actions taken against them: AZ Licensed CPAs.
If you need assistance with estate planning, probate, or a trust administration, contact Arizona Probate, LLC. See our Services page for a list of services provided and rates.
The information on this website is for informational purposes only and should not be construed as legal advice.
