Nothing ever comes free, even money and assets you inherit from your parents after they pass away. There may be some taxes due if you decide to cash out on the stocks you inherit from a loved one’s estate.
Before you go cursing your father’s or mother’s grave, there is an important aspect to inheriting stocks you must know. Maybe it’s the last thing you want to think about, but the information will help you decide how to proceed.
If you just inherited stocks from an estate, continue reading below to learn about the cost basis of inherited stock.
Understand Cost Basis of Inherited Stock
Finances are sometimes difficult to understand, especially when you hear new words and terms. The cost basis of a stock may be new to you, but it’s rather simple to understand.
The cost basis is the initial buying price of a stock in addition to any commissions. The cost basis is also adjusted for any dividends, stock splits, and distributions.
If you sell the stock, you pay taxes on the capital gains, which is the difference between the basis and current market value.
Good News for You
There is some good news regarding the cost basis of an inherited stock if you plan to sell. The cost basis is determined by the value of the holding at the time of the previous owner’s death.
It’s as though you purchased the stock on the date of your loved one’s death.
For example, assume you inherit a holding in the Dow and plan to sell. If your loved one died today, the cost basis would be the value of the Dow Jones industrial average today.
Taxes on Capital Gains and Losses
When you sell the stock, you should pay attention to whether or not the stock has accrued or lost value from the time you acquired it. Since you didn’t buy the stock yourself, you may be making a profit regardless.
However, gains and losses each have different tax implications.
If the stock gains value from the time you acquire it, you’ll pay taxes on those capital gains as a source of income.
On the other hand, you may sell the stock for less than the cost basis at the time of inheritance. In this case, you can use the loss as a tax write-off against other sources of income or capital gains.
Finding all this information can be difficult, especially if the probate process is complicated. You may need to consult a financial advisor and an accountant.
Thanks, Mom and Dad!
The death of a loved one can be emotional and trying. However, your loved one may have thought of you and left you some of their assets.
While the gifts are generous, you need to think about the important tax implications.
The cost basis of inherited stock is determined as though you bought the stock on the day of the previous owner’s death. This is good news if you decide to sell the stock.
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