NUA Step Up - Community Property

[Romper]

NUA (Net unrealized appreciation)

We live in Arizona. Arizona is a Community Property State.

Upon the death of one of the spouses in this community property state (AZ) , the cost basis for assets of both spouses are stepped up to the value on the date of death.

I utilized the NUA when I retired to transfer shares of company stock from my employer to a brokerage account. I received an IRS Form 1099-R showing the value of the NUA.

Question:

Upon the death of my spouse, can the cost basis for my stock beyond the value of the NUA increase to the value on her date of death?

A link to any supporting documentation would be appreciated.

[Bsch4477]

https://www.raymondjames.com/greenwealthmanagement/pdf/net-unrealized-appreciation-investor-guide.pd...

[Romper]

Thankyou Bsch4477

Unfortunately the article does not address my question.

I.e., In a Community Property State - Upon the death of my spouse, can the cost basis for my stock beyond the value of the NUA increase to the value on her date of death?

Unless I missed something, the article only speaks to a step up for a beneficiary. This I know.

"NUA amounts do not receive a step up in cost basis at the owner’s death. When your
beneficiaries sell the stock they inherit, they will owe long-term capital gains tax on the NUA.
Any additional appreciation between the date of distribution and the date of death would be
entitled to a stepped-up basis in the shares they inherit under the current law"

[dmertz]

IRS Revenue Ruling 69-297 indicates that NUA of stock inherited by a beneficiary does not receive a step-up in basis because it is considered to be deferred income.  This means that the NUA is treated the same as if it had never been distributed from the employer plan and except that when the the stock is sold the NUA is taxed at long-term capital gains rates instead of, when distributed from the employer plan, as ordinary income.  In either case it's treated as income in respect of a decedent.

[Romper]

Thankyou dmertz but I think the question remains unanswered.

I still own the stock, it has not been received by a beneficiary.

I understand the NUA does not get a step up. It's the gain in the value of the stock after I utilized the NUA in 2007.

Restating:

Upon the death of one of the spouses in this community property state (AZ) , the cost basis for assets of both spouses are stepped up to the value on the date of death.

My question remains:

As Community Property - Upon the death of my spouse, can the cost basis for my stock beyond the value of the NUA increase to the value on her date of death?

[dmertz · Accepted solution]

Gains after the stock is distributed from the plan are ordinary appreciation, not deferred income, so the cost basis to the surviving spouse in a community property state should be the date-of-death [edited] value of the stock minus the NUA.  (I was originally going to state that in my first reply, but not realizing that that was the crux of the question I chose to omit it.)  If the value of the stock drops below the NUA, I don't think that the cost basis can be below zero.  If sold when the value is less than NUA, there is just less taxable income.

Consider the degenerate case where one does an NUA distribution where the NUA is equal to zero.  Whatever step-up in basis the surviving spouse gets if there was no distribution of NUA the surviving spouse should also get if there was an NUA distribution where NUA is zero.  Having called it a distribution of NUA shouldn't make any difference in the cost basis to the surviving spouse.  You could even wash out the NUA characteristic by after distribution immediately selling the NUA shares (at the distributed share value) and repurchasing the shares at the same price.

[Romper]

Thanks dmertz

I think you are agreeing that the step up would apply to the gains beyond the NUA??

You stated.. Would the addition of the bold text be correct?

Gains after the stock is distributed from the plan are ordinary appreciation, not deferred income, so the cost basis to the surviving spouse in a community property state should be stepped up to the value of the stock as of the date of the spouse 's death minus the NUA. 

[dmertz]

I've added "date-of-death" to the previous reply as you indicated; I meant to include that originally.  However, I did not add "stepped up to" because there could also be a step down in basis if the date-of-death value is below the distribution value.

[Romper]

Stepped up/down. My mistake. In my example there is an increase in value since the NUA.

Thanks