Capital Loss Inheritance


W

William Brenner

I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
<g>
 
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B

Barry Margolin

I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair?
How is this taxation any more unfair than the capital gains
tax he'd owe if he'd purchased the shares himself? He's
still way ahead, since he never had to pay the original $75.
It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
I assume that the price decline reduced the decedent's
estate, so it reduced the estate tax, leaving more capital
for his heirs. And since the estate tax rate is
significantly higher than capital gains tax rate, the
savings here was quite a bit.
 
I

IraS1

I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
<g>
Correct, yes. Fair, why not? If you can mark up basis when
the value increases, why not mark it down when it decreases?
Better to have gifted, in this case, yes.

Ira Smilovitz
 
R

Rich Carreiro

I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct?
Yes.

Is it fair?
It's no more or less fair than when the basis reset
spares the heirs lots of cap gain taxes.
It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
Yes, the heir would have been better off.

Stock with a basis of $100 which is gifted away when it is
at $75 takes on a dual basis of $75 for computing losses and
$100 for computing gains. If the stock is later sold for
over $100, the basis is $100. If the stock is sold for less
than $75, the basis is $75. If the stock is sold for between
$75 and $100, the basis is whatever the stock was sold for
(i.e. no gain or loss occurs).
 
P

PeterL

William Brenner said:
I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct?
Yes.

Is it fair?
Define "fair".
It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
Well, if they can predict the future, yes (that the stock
would appreciate again). In general you are better off if
you can predict the future.
 
A

Arthur Kamlet

William Brenner said:
I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
I can answer your question about taxes, but I'd need to be a
philosopher, preacher and prophet to answer questions of
fairness.

If the stock was bought at 100 and valued at 75 on date of
death, then unless federal estate tax can be saved by
valuing all property at the alternate valuation date, the
cost basis of inherited property is its date of death value.

Note that had he given away the stock a day before death at
$75, then the recipient would use $100 as cost basis only to
compute gain, but would use the $75 figure to compute loss
when the stock is eventually sold.

This means the donor could not give away the loss to anyone!
Giving the stock away would not have helped the recipient's
capital gain situation.

What he could have done is sold enough stock at a loss to
generate a $3000 loss, and that could have been used on his
final Form 1040.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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P

Phil Marti

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct?
Yes

Is it fair?
Well, considering that he still has $75 per share in untaxed
income, it won't keep me up at night.
It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
That wouldn't have helped. When determining whether there's
a loss on the disposition of gifted property, the basis is
the lesser of the donor's basis or the item's FMV on the
date of transfer.

See IRS Publication 551.

Phil Marti
Clarksburg, MD
 
G

Gene E. Utterback, EA

William Brenner said:
I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course. <g>
What has "fair" got to do with anything? Your initial
comment is correct - inherited items have a basis equal to
the Fair Market Value at the date of valuation, either the
date of death or 6 months later at the discretion of the
personal representative.

This concept of basis on inherited items is one that I have
taken up with many colleagues - as tax pros we tend to talk
about "stepping up basis" on inherited items. While a step
up does usually occur, the correct phrase is that basis gets
"adjusted" on inherited items.

Lastly, regarding your comment about being better off
gifting - this is a hindsight analysis, on point I agree but
done in retrospect with full knowledge of what has already
happened. It is akin to saying "had I know what was going
to happen on 9-11, I wouldn't have gone to NY to sightsee
that week."

Gene E. Utterback, EA
 
H

Harlan Lunsford

William said:
I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course.
<g>
Hmm, I'm not sure, but isn't the rule for a gift "cost or
fmv, whichever lower at time of gift?"

ChEAr$,
Harlan Lunsford
 
M

MTW

William said:
According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair?
It is correct. Basis is adjusted to FMV at date of death,
whether up or DOWN. The downward adjustment is just as
"fair" as the upward adjustment, in my opinion.

MTW
 
B

Bruce Raskin CPA

I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course. <g>
The basic rule is that stocks are valued at date of death.
If the value is higher then the purchase price the gain is
not taxed, If it is less, the loss is not deductible. The
shares are not valued at purchase price in any event.

Bruce Raskin, CPA
Phoenix, AZ
 
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D

DEWard

William Brenner said:
I am well aware that the basis of inherited stock is the
price on the date of death (or possibly later). But what
about this scenario:

A decedent had purchased stock at $100/share. The price
declines and the shares are inherited at $75. They recover
and once again are worth $100.

According to the above, it would appear that the heir has a
potential capital gain of $25/share. Is this correct? Is it
fair? It would seem that the heir would be better off had
the decedent gifted the shares -- prior to death, of course. <g>
You are correct. The Cost basis is the share price used to
value the estate. By having the lower price, the estate may
have paid a lower tax.
 
P

PeterL

I am well aware that the basis of inherited stock is the
Correct, yes. Fair, why not? If you can mark up basis when
the value increases, why not mark it down when it decreases?
Better to have gifted, in this case, yes.
If you can predict stock prices, sure. But if you can
predict stock prices, paying taxes would be the least of
your concerns.
 
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H

Harlan Lunsford

Arthur said:
PeterL wrote:
Especially future tax laws.
And on that subject, I would say, Don't even THINK about
trying.

Many years running clients would ask me if they could deduct
their kids college tuition, and I would always reply, year
after year, "Never in a million years!"

As James Bond movie title suggests, Never Say Never.

Merry Christmas,
Harlan Lunsford
Mon, 20 Dec 2004 21:35:15
 

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