Q. Dear Rick:
I have a tax question that I hope you can help me with. My taxes are very straightforward and I do them myself. All I have is the income from my job as well as some interest. I have no deductions so I just take a standard deduction. All my money is in my IRAs and 401(k). Last year after reading one of your columns and attending one of your library talks, I decided to do a Roth conversion. At the time I did the conversion to pay the taxes I sold the one stock that I owned. The question I have is about the sale of that stock. I got that stock over 30 years ago when my grandmother passed on. I have no idea what she paid for the stock but I do know what it was worth when I eventually received the stock after her estate was in probate for over five years. Hopefully, you can help me.
A. Dear Jerry:
The proper number to use for cost basis on an inheritance is not the value of the stock when you received it but rather, the fair market value on the date of death. Therefore, what you need to do is to figure out what that stock was selling for on the date your grandmother passed away. The value of the stock on the day your received it or what your grandmother paid for the stock are not relevant when it comes to an inheritance. On inherited property, other than a few exceptions the value for tax purposes is the fair market value as of the date of death.
What causes confusion is that there is different tax treatment between a gift and an inheritance. If, for example, your grandmother while she was living gifted you the stock, then for tax purposes your basis would be what she paid for the stock. For gifts which are transfers of property while both parties are living, the basis is what is known as a transfer basis. Therefore, if your grandmother had gifted you the stock and she had paid a dollar a share for it that would be your basis for tax purposes. On the other hand, if she paid a dollar a share and upon her death the stock was worth $100 a share, if you inherited the stock your cost basis would be $100 a share.
Many people are sometimes in the situation where they did receive a gifted stock and have no idea what their true basis is. After all, the person who gifted them the stock may not know what their basis is or in fact, are no longer alive. In those situations taxpayers need to guestimate what their basis is. I have found in those situations where taxpayers are reasonable and have a solid reason for their guestimate, if they are audited the IRS is reasonable. On the other hand, if you merely pick a number out of the air without any reason, if you are audited the IRS may not be so reasonable.
Many grandparents gift stock to their grandchildren. If you are a grandparent and you do gift stock to your grandchild then it would make sense to somehow document what your basis is so eventually when they sell the stock they won’t have to go through any aggravation. After all, isn’t that the last thing that you want to do when you make a gift is to cause someone grief?