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IMG15
Returning Member

Cost basis on inherited stock

Since NY is not a community property state, what are the regulations for cost basis on a joint tenant w rights of survivor account and a tod? 
Which IRS publication covers this?

thank you

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9 Replies

Cost basis on inherited stock

Here's the IRS's short version, which then refers to Pub 555 "Community Property":

Inherited Property

The basis of property inherited from a decedent is generally one of the following.

  1. The FMV of the property at the date of the individual's death.

  2. The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. For information on the alternate valuation date, see the Instructions for Form 706.

  3. The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. This method is discussed later.

  4. The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. For information on a qualified conservation easement, see the Instructions for Form 706.

If a federal estate tax return doesn't have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes.

 

For more information, see the Instructions for Form 706.

 

Appreciated property.

The above rule doesn't apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis.

Community Property

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married individuals are each usually considered to own half the community property. When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return.

 

For example, you and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse's estate. The FMV of the community interest was $100,000. The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse's heirs is also $50,000.

 

For more information on community property, see Pub. 555, Community Property.

IMG15
Returning Member

Cost basis on inherited stock

Hi and thank you for getting back to me.

 

My parents had a portfolio of stock in a joint account. 

My dad died in March 2018 and my mom died in December 2018.

 I know there’s the option to do a stepped up cost basis using my dad’s date of death.  I’m being told that since NY is not a community property state,  only 50% of the assets would get the stepped up cost basis. 

I am trying to find the IRS publication that would cover this.

thanks again 

Cost basis on inherited stock

Whose income tax return are you preparing and for what year?

 

Your parent's last income tax return (2018) should have been submitted by now, and if some stock was sold by your mother between the time of your dad's death and her passing the situation should be straight forward.

 

If your mom inherited dad's stock and you inherited your mom's stock then the "non-community property state" issue should be moot.  All the stock you inherited would have a basis dictated by the fair market value of the stock on the date of her death.

IMG15
Returning Member

Cost basis on inherited stock

I need to determine the cost basis on stock I inherited from my parents.  My brokerage firm is telling me only 50% of the assets I received from my mom can be stepped up to her date of death.  
I need to find documentation proving them wrong or right.  The IRS website is of no help and no one answers their phone.

 

I did a joint tax return for my parents 2018 and filed a schedule K-1 for the ordinary dividends my mom’s estate earned in 2019.

 

The tax return in question would be my 2019 federal and state.  Sold some stock in 2019.  If the cost basis gets stepped up to my mom’s date of death, I break even or take a small loss.  If I can only step up 50%, I would have a substantial gain.

 

Im aware of IRS publication 555 is for common property states.

 

What I need is the IRS publication for NY as an equitable distribution state.


Thanks for your time and help. 

Cost basis on inherited stock

Is this focusing on the NY state income tax return, or the federal income tax return?

 

I know next to nothing about NY state income taxes so if that's the focus here I'd suggest a new post explicitly mentioning the "New York" aspect of the question and clearing laying out the timeline of the events and alsomaking it clear that you're asking for help about your 2019 income tax return.

 

The whole issue of basis for securities inherited in community property or common law property states pertains to property passed between married couples.  For federal tax purposes the basis of stock inherited by the surviving spouse does depend on whether they resided in a community property state or a common law property state, and how title was held.  But at the death of the last surviving spouse the whole issue of community property/common law property state is irrelevant because the person(s) inheriting the securities isn't the spouse of the deceased.  The basis of the stock in the hands of the deceased and how it was determined is no longer an issue because all the securities get a step up in basis at date of death.

 

The text quoted in my original reply makes this last point clearly: "The basis of property inherited from a decedent is generally...(t)he FMV of the property at the date of the individual's death."  The section dealing with "Community Property" deals only with the special case of married couples inheriting securities from a deceased spouse.

 

I'd guess that most states follow the federal rules in this area, but that's a guess. 

IMG15
Returning Member

Cost basis on inherited stock

My goal is to have a corrected 1099 generated reflecting accurate cost basis on stock I sold in 2019. Once the 1099 is corrected, that information will be submitted to the IRS.

The stock were solely owned in NY, an equitable distribution state.

 

All I am looking for is the IRS publication explaining the terms of equitable distribution in NY. I need to provide the IRS publication or the law covering this info to my brokerage firm to get the cost basis stepped up to my mom’s date of death.  Currently, the brokerage firm will only step-up 50% of the shares.

Since there is an IRS publication 555 discussing  Community property states, I would think there would be an IRS publication discussing the terms for non-community property states.

 

I am not looking for advice, just an IRS publication. 

thanks 

IMG15
Returning Member

Cost basis on inherited stock

FYI  

The IRS publication is 551.

Cost basis on inherited stock

Pub 551 essentially states the exact same thing as Pub 555 as far as I can see.  There's no explicit reference to "equitable distribution" here and in any case the concept of equitable distribution also refers to assets owned by married couples. 

 

In my experience brokers generally have a pretty good handle on basis issues, so perhaps they know something that you haven't disclosed here that, somehow, makes their reporting of basis correct?

 

IF you are absolutely sure that the basis of the securities you sold should be the FMV at DoD AND you are absolutely sure that the basis reported by the broker is wrong THEN I'd simply enter the 1099-B exactly as it reads and then use TurboTax's process, (a process that this year seems to be different between the desktop and online programs), to correct the difference.  That will result in the sale(s) using the correct basis and the change from whats reported by the broker will be properly reported on Form 8949.

IMG15
Returning Member

Cost basis on inherited stock

With close to 30 years as a broker, my experience has been that the brokerage firm is not always right and will fall back on “ consult your accountant or tax preparer.”

 

Spoke with an IRS agent who confirmed 551 starting on page 9,  “FMV of the property at the date of the individual’s death”. That applies 100% of the inherited assets and not 50% of the inherited assets.

 

All I needed was the publication number to support my case.  

Already contacted my brokerage firm’s back office and they are correcting my cost basis.

 

Mission accomplished.

 

Thanks and have a good weekend. 

 

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