Let’s say you bought shares of stock for $50,000 20 years ago. The company did well, and the stock appreciated so that the shares are now worth $150,000. That would not be an unusual scenario; in fact, an “average” stock that moved with the broader market would have more than tripled in value over the 20-year period that ended in May 2019.1
If you sell these shares for $150,000, you would realize a capital gain of about $100,000, the difference between your basis in the asset — typically the purchase price plus any associated expenses — and the price you received when selling the shares. Depending on your income level, you might be liable for capital gains taxes of $15,000 or $20,000 on the transaction (see chart).
Gift vs. Inheritance
Now let’s say you don’t need the money from this particular investment for retirement, and you want to give the shares to your children. If you give the shares to them during your lifetime, the $50,000 basis will carry over with the gift, so your children might also face substantial capital gains taxes — for the gains during your lifetime plus any additional gains that occur before they sell the shares.
However, if you leave the shares to your children in your will, the basis will step up to the value of the shares at the time of your death. So if the market value of the shares is $150,000 at that time, your heirs would be liable only for taxes on any capital gains above the $150,000 basis. For tax purposes, the step-up in basis erases all capital gains of an asset that occurred before the death of the asset’s owner.
The step-up in basis provision offers a great opportunity to help reduce capital gains taxes and preserve the value of assets you leave to your heirs. It applies to many types of assets, including real property such as your family home, which may have experienced significant appreciation during your lifetime. Some inherited assets such as cash, variable annuities, and retirement accounts are not eligible for a step-up in basis.
Note that basis might be stepped down if an asset has depreciated in value. Basis in real property may be adjusted upward for the cost of improvements or downward for depreciation taken for tax purposes and insurance reimbursements for casualty losses or theft. It would be wise to consult a tax and/or estate planning professional before taking action on specific assets.
1) Thomson Reuters, 2019, S&P 500 Composite Index for the period 5/31/1999 to 5/31/2019. The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. All investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results. Actual results will vary.
This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.