"step up in basis" rule

[ratface]

My question is on the clarification of this federal tax code rule. My understanding is that capital gains tax is forgiven at death for inherited property. "Someone who inherits stock or other property and later sells it is subject to capital gains tax on the difference between what the stock was sold for and what the stock was worth when inherited. The capital gain from when the stock was purchased to when it was inherited is taxed at zero. "

Dose anyone have experience with this type of transaction and can verify that this rule is in fact true? My situation would involve selling ATT stock inherited in 1998 at a cost basis of $53 and selling it today at $35. Would this then be a capital loss and incur no tax or would it still be treated as a capital gain under my marginal tax rate of 25% married filing jointly giving me a 15% tax rate on the sale of long term capital gains?

My plan if it makes sense is to payoff two separate Parent Plus student loans of appx. $21K each with monthly interest rates of around 8% which are costing me around $150 a month combined.

 

[Amethyst]

Ratface!! I was just thinking of you the other day and wondering how you were doing, since I have not seen you on the forum since you shared your cancer battle with us years ago.

I will leave your question to the forum tax experts, although it sounds like a nice little capital loss to me...one you could set against any capital gains you happen to have.

Amethyst

 

[FIRE'd@51]

Dose anyone have experience with this type of transaction and can verify that this rule is in fact true? My situation would involve selling ATT stock inherited in 1998 at a cost basis of $53 and selling it today at $35. Would this then be a capital loss and incur no tax or would it still be treated as a capital gain under my marginal tax rate of 25% married filing jointly giving me a 15% tax rate on the sale of long term capital gains?

It's treated as if you bought the stock for 53 in 1998. Thus, it would be a LT capital loss, which would be applied first to LT gains and then to ST gains. If you still have a net loss, you can take a $3,000 deduction against ordinary income. If anything is still leftover, you must carry the remaining LT loss forward and repeat the process next year, and so on.

 

[GrayHare]

Yes. I think of it as a reset of the cost basis. Note that T stock has split and spunoff other companies myriad ways over the decades and those events also adjust the cost basis. Which, if any, have happened since 1998 I don't know. T is so widely held there exist apps that help you figure the proper cost basis.

 

[MRG]

That's how it worked when DF passed. Had nice losses on a few funds that I already owned in my rollover IRA , wrote off 3k in losses.

 

[pb4uski]

Yes, any gain between the fair value at the date of death and the decedent's cost basis is not recognized. The beneficiary's basis is the fair value on the date of death. Assuming that is $53, you would have an $18/share capital loss that can be used to offset other LTCG you may have or $3k/year of it is used to reduce ordinary income.

 

[target2019]

If you hold 1,000 shares of T, the dividend is covering the loan payment...

But you are paying some tax on the dividends, correct?

How about gifting him the stock, especially if he is in lower bracket? Then he uses dividends to make the loan payments.

 

[FIREd_2015]

My understanding is you get the step up in basis unless the assets were held as joint tenants and the joint tenancy is between a parent and child.

 

[LOL!]

Yes. I think of it as a reset of the cost basis. Note that T stock has split and spunoff other companies myriad ways over the decades and those events also adjust the cost basis. Which, if any, have happened since 1998 I don't know. T is so widely held there exist apps that help you figure the proper cost basis.

This post is so true. It is very unlikely that ATT stock shares acquired in 1998 have a loss today, but it is possible because value could have gone to spin-offs. There has been a reverse split, too.

See, for example, How to calculate your cost basis and access cost basis worksheets | Investor Relations | AT&T

 

[ratface]

Hi Amethyst, It's so nice to be remembered. I'm doing remarkably well. Target 2019 unfortunately I don't have 1000, only about 500 shares. Nonetheless it seems the prudent thing to do is get rid of the student loan interest since the stock sale should not hurt me too bad. I failed to realize that the non-subsidized loans started accruing interest immediately. I was under the impression they were deferred until six months after graduation. I see why so many people get in trouble with these loans, seems a bit on the loan sharking side. I was holding off paying because in case of the death of the borrower, "Me" the loans are forgiven and as Amethyst remembers my past health has been questionable. I'm thinking it's best to just pay them off asap.

 

[pixelville]

As others have pointed out, in general, you assume the cost basis based on the price at the day of death. Note, this may vary based on where/how the stock was held before you inherited it (trust, joint in community property, etc).
You can use the calculator on AT&T website to find the adjusted cost-basis based on spin-off/splits and other such events. Use the appropriate link from the left margin.
Cost Basis Guide | Investor Relations | AT&T

 

[bingybear]

Dose anyone have experience with this type of transaction and can verify that this rule is in fact true? My situation would involve selling ATT stock inherited in 1998 at a cost basis of $53 and selling it today at $35.

be a little careful with this one. ATT spun out lucent in '96.. yes this does not involve you. But ATT likely spun out other companies like LU did, and this could effect you basis. ATT was bought by a baby bell that change it's name to ATT... which could have effected your basis (not sure how they did this was dpne). you need to track all the splits, spin offs, buy outs an how these effected shares. you can't just look at snapshots of inherited and sold days. If it is anything like Lucent... you have a lot of work ahead to sort this out.

 

[meierlde]

be a little careful with this one. ATT spun out lucent in '96.. yes this does not involve you. But ATT likely spun out other companies like LU did, and this could effect you basis. ATT was bought by a baby bell that change it's name to ATT... which could have effected your basis (not sure how they did this was dpne). you need to track all the splits, spin offs, buy outs an how these effected shares. you can't just look at snapshots of inherited and sold days. If it is anything like Lucent... you have a lot of work ahead to sort this out.

There are tools both at the ATT web site and here: for free on att basis:A T & T and here for 119 going all the way back before the big spinoff AT&T Cost Basis your fortunate that the stock did not predate 1984 or you would have a lot more to worry about. (All the baby bells and their merging and the like)

 

[bingybear]

There are tools both at the ATT web site and here: for free on att basis:A T & T and here for 119 going all the way back before the big spinoff AT&T Cost Basis your fortunate that the stock did not predate 1984 or you would have a lot more to worry about. (All the baby bells and their merging and the like)

Nice that ATT had the data setup for the investor. I remembering having to pull my LU info for others that had not kept all the spin off data when they sold LU stock.

 

[EastWest Gal]

Cost basis is on the end of the day of death. My dad passed on a weekend and the cost basis of everything was based in the end of the day the Friday before. My sister and I were staring at 11K shares of Chevron stock each. We both diversified as quickly as we could as it was 2009 and everything was on the way back up. There were other investments as well, and everything was figured on the cost basis on the day of death.

Selling at a loss allows for a capital loss spread over years. The previous post regarding the $3K/yr limit is correct. But it can be spread out over years. So keep really good records.


Sent from my iPhone using Early Retirement Forum

 

[kaneohe]

My understanding is you get the step up in basis unless the assets were held as joint tenants and the joint tenancy is between a parent and child.

Here is something about jointly held property.....Basis of Inherited Property (Community and Non-Community Property) - CFP | Investopedia

What happens to the basis for jointly held property?

Non-Community Property:
Property held jointly receives a "step up" to FMV for the portion of the property that belonged to the decedent.

Community Property:
Property held jointly receives a "step up" in basis to FMV on both halves at the death of the first spouse.

 

[RE2Boys]

Many posters have alluded to the fact that there have been multiple mergers/spinoffs/reorganizations to the corporations now known as AT&T. You can't just take the stock price of AT&T on the day you inherited it and use that as a basis as it is not the same company now that it was in 1998! In the interim you have received other distributions as part of the reorganizations/spinoffs and each time you had to re-allocate your basis between what you owned before the reorg/spinoff and what you owned after the events. It is rather convoluted, I've attached a chart from AT&T Corp Flowchart
You've got to first determine exactly what you inherited in 1998 and what's happened since then.

 

[jetpack]

The splits are indeed confusing. I just went through inheriting AT&T stock a few years ago (along with all the spinoffs). You should have shares of Comcast as well? ... Unless it was SBC shares you had?