For heirs, a good first step is to keep careful records of what you inherited and the assets’ value at the date of death. After an inheritance, you get a stepped-up basis, to current market value. A knowledge of your new basis can help in your planning and reduce future tax obligations.
Suppose, for example, your great-aunt Joan invested $10,000 in Johnson & Johnson stock many years ago. After stock splits and dividend reinvestments, her J&J stock had appreciated to $90,000, at the date of her death. If you inherit the stock, your basis is $90,000, not $10,000.
Thus, if you need cash you can sell the shares for $90,000, immediately after Joan’s death, and owe no income tax on the sale. If you decide to hold on, you’ll have a $10,000 gain on a future sale for $100,000 and a $10,000 loss on a future sale for $80,000, to give some examples. Knowing your basis on inherited securities can help you make buy or sell decisions while keeping good records will help you calculate a future capital gain or loss.
