Sunday, July 22, 2007

Stepped-Up Basis - One Benefit of Dying (But not for you)

Dying is such a bad thing that the IRS has a couple of ways to help your loved-ones deal with the loss. One of the tax benefits is a concept called "stepped up basis" which applies in the area of capital gains tax. What this means is that assets you own at your death, with a few exceptions, will have a new tax basis equal to the value on your date of death. In order to understand the benefit of this tax benefit, consider this illustration:

You bought shares of a stock for $10,000. That is your cost basis. Your investment does great (unlike my selections) and it has increased in value to $15,000. You decide to take cash out and take your money. You will be capital gains tax on the increase of $5,000. (Market value less your cost basis.)

However, let's say right before you were able to sell the stock, you step on a rake in your yard, stumble backwards and get hit by a Hummer and killed instantly. Your estate would be able sell the stock and the new cost basis would be equal to the market value at the time of your death ($15,000 in this case.) Thus, if the stock was sold the same day, there would be no capital gains tax at all. Not a bad deal...just not for you.

And who said there was nothing good about dying?

2 comments:

Anonymous said...

What happens to assets that show a capital loss at the time of the owner's death?

Are the potential benefits of a capital loss write-off lost?

Matthew Gardner said...

Generally, the answer is "yes". To the extent that the loss is not used on the decedent's final tax return, they are lost. The estate and the decedent are separate taxpayers. If there is a surviving spouse and depending on how the assets are owned, there may be some other options, however.