Q. My mom recently passed away, and I’ve inherited her stock portfolio and have some questions. Some of the cost basis shows on the statements, but many of the stocks have “please provide” next to them. The brokerage is a low-cost firm, and when I asked them about cost basis information, they said they do not provide tax advice. I’ve never owned individual stocks before and plan to sell most of these and invest in ETFs or mutual funds. Some of the stocks were acquired many years ago, and I have no idea how to go about determining what the price was when mom bought these. It looks like some of the stocks she held split, some paid dividends outright, while others bought more shares with reinvested dividends. She also bought some stocks a few months before her death, which do have the cost basis indicated.
My questions are: 1) How do I determine the cost basis for those holdings where it is not indicated, and 2) Do I need to hold all the stocks for a year from her date of death to get the long-term capital gains tax rate or just the recently purchased stocks she held for less than a year? I could seek counsel from a tax professional but thought I’d write to you first in the hopes that you will answer my questions for free as they may be of interest to others.
A. I’m sorry to hear of your mother’s passing. Your situation is much less complicated than you think, and I will be glad to provide answers to your questions. If while living your mother had gifted the stock to you, the determination of cost basis would be much more complex.
The cost basis of any inherited stock is determined by the average stock price on the deceased’s date of death. For large estates subject to estate tax, the executor may elect to set the basis of assets at the value six months after the owner died rather than the date of death. If six months after the date of death the value of the assets held by the estate have decreased, the executor may want to use the lower value, thereby reducing the estate tax. Inherited stock that has appreciated during the original purchaser’s lifetime receives a stepped-up basis to the fair market value on date of death. If the stock has fallen in value during the original owner’s lifetime, the cost basis is stepped down to the fair market value on date of death. You will not owe any tax on the stock gains during your mom’s lifetime, and you cannot use any of the losses that occurred prior to her death as a tax deduction.
When you sell inherited stock, the gain or loss is always long-term. It does not matter how long the deceased had owned the shares or how long you own the shares prior to selling. To calculate your gain or loss when you sell, subtract your stepped up (or down) cost basis from the proceeds of the stock sale. Multiply this amount by the appropriate long-term capital gains rate (0 percent, 15 percent or 20 percent depending on your income tax bracket). Stock sales are reported on Schedule D of your tax return.
As you go through the process of settling your mom’s estate, I’m sure other questions will arise, and paying for professional advice is recommended.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624