NUA - Sale Of NUA Shares And Post NUA Gains All At One Time

[Romper]

Upon my retirement in 2007, I utilized the NUA option to transfer the shares of my company stock held in my 401K (ER Stock Contribution) to a taxable brokerage account. I received the 1099-R from the brokerage house and I paid the tax for the cost basis.

The market value of the shares has increased significantly since 2007.

I believe the value of the shares beyond the NUA will be taxed as long term capital gains (assuming no short term gains).

Question:

If I sell all the shares, will the brokerage house provide two 1099's? I.e. A 1099 for the the gain of the shares after the NUA and a 1099-R for the NUA?

Thanks in advance..

[dmertz · Accepted solution]

"will the brokerage house provide two 1099's? I.e. A 1099 for the the gain of the shares after the NUA and a 1099-R for the NUA?"

You mean 1099-B, not 1099-R.  The 1099-R showing the distribution of NUA was issued in 2007.  With only long-term capital gains, there is no need for separation.  Your cost basis is simply the basis that the NUA shares had,  The gross value of the shares distributed in 2007 minus the amount shown in box 6 of your 2007 Form 1099-R.  It's likely that the Form 1099-B that you receive for the sale of the NUA shares would indicate Code E is to be used on Form 8949 to indicate a long-term investment for which cost basis is not being reported by the broker.

[Romper]

Thankyou dmertz...

Code E would be appropriate as the shares were acquired prior to the cost basis reporting changes 2011/2012.

My bad - 1099-B, not 1099.

[dmertz]

Brokerages always treat shares distributed in-kind from a qualified retirement account as noncovered shares.

[Romper]

dmertz - Thanks for the update..

As I've thought more about your reply....

"Your cost basis is simply the basis that the NUA shares had,  The gross value of the shares distributed in 2007 minus the amount shown in box 6 of your 2007 Form 1099-R".

Is there a best way to handle the sale and report the gain if I decide to sell half of my shares? That would seem to be a mix of NUA as well as growth in value after 2007.

Assume for example - 1099-R received in 2007:

Gross value - Box  1 = $250,000

Amount in Box 6 (NUA) = $200,000.

Cost basis in 2007 = $3.50 per share.

Current price per share (2024) = $75.00.

Does your reply mean the $3.50 per share cost basis would apply, even for the growth beyond 2007??

Note that there were no reinvested dividends or additional shares purchased since 2007.

Thanks in advance, I've appreciated your guidance in past years.

[Mike9241]

growth is irrelevant since you were never taxed on it. as @dmertz pointed out your cost/tax basis per share is = (box 1 less box 6 amounts) divided by the number of shares received.

In Turbotax you can enter the sale manually using the capital asset sales worksheet (use code E) or import from the broker. Not all brokers partner with Turbotax to allow import.  

[dmertz]

"Does your reply mean the $3.50 per share cost basis would apply, even for the growth beyond 2007??"

Yes.  The basis does change (unless these shares are inherited by a beneficiary, in which case only the post-distribution gains would get a step-up in basis; NUA does not get stepped up because it's considered to be income in respect of a decedent).  The NUA distributed became long-term gains upon the distribution in 2007 as do the post-distribution gains.

[Romper]

Thankyou dmertz and Mike9241..

dmertz seems to raise a possible solution to the tax hit if the $3.50 cost basis used for the sale of all shares at today's price of $75 per share.

We are residents of a community property state.

Upon the death of the first spouse, the cost basis of the assets of both spouses is stepped up to the value on the date of death. (The NUA does not get a step-up).

My wife is in poor health. Assuming she is the first to die, does this work after the step-up in the cost basis?

1. Sell the number of shares needed to bring the value of the remaining shares to the NUA of $200,000.
2. Within Turbotax, use the "I need to adjust my total cost basis" to show the stepped up cost basis for these shares.
3. Sell the remaining shares equal to the NUA of $200,000.
4. Then again use the "I need to adjust my total cost basis" to show the $3.50 cost basis for these shares.

Thanks again in advance.

[Romper]

Thankyou Mike9241..

I assume you can see my reply to dmertz.

[dmertz]

I haven't thought much about the step-up in basis in NUA shares in a community-property state, but assuming that these shares constitute community property, I would expect that the cost basis of each share would be increased by the post-distribution gain upon the death of your spouse and that each share would still have the same amount of NUA.

[Romper]

Thanks for your reply...

That sounds complex. Do you see a reason why my plan would not be appropriate? It's easy to calculate and simple to report.

I wonder if the net result might be the same as "each share would still have the same amount of NUA".

Also, as I think about it, I don't believe I would need to use the "I need to adjust my total cost basis" feature in Turbotax since the 1099-B would show Box E, basis not reported to the IRS. I would just report my calculated cost basis.

Mike9241...

Your thoughts??

[dmertz · Accepted solution]

Your approach seems overly complicated, but I think it produces the same result as long as all shares are sold and are sold in the same tax year.  Still, there is no need for separate sales to report your way.  Either way the total basis applied is the original $3.50/share basis plus the step-up on the post-distribution gains, so I see no reason not to simply report a single sale of all shares and use the total combined basis to determine the long-term capital gain.

[Romper]

Your suggestion of a combined basis makes reporting even simpler.

It's unfortunate that the death of a spouse in a community property state is what makes the step-up work for the appreciation in excess of the NUA.

The attached document has been helpful in understanding the appreciation in excess of the NUA. See the outlined text on pg. 2.

Thanks again for your guidance over the years.