Inherited stock, no capital gains taxes?

[giogis245]

Hello, we're on the final stretch!  I have a client who came in with this form, she inherited stock from her grandpa.  He passed in July of 2022, she withdrew the money in Aug 2022, her Merrill Lynch stock broker told her she would not have to pay taxes. I've never had a situation like this, so your help is greatly appreciated!  

[ILLMAS]

https://www.investopedia.com/terms/s/stepupinbasis.asp#:~:text=Step-up in basis%2C or,the asset is sold later.

[giogis245]

Thank you! Do I include form 8949 or nothing at all since based on this, client does not pay capital gain taxes.  

[ILLMAS]

Hello Teresa, you would report it as like any other stock sale but you need to go back to date of death and look up the value of the stocks.  That would be your cost basis, there is a chance the stock didn’t appreciate in value between DOD and when your client sold them.

[Lee B]

The stock market has been pretty volatile, there is an equal chance of significant price changes.

[Lion EA]

You have to use Form 8949 to report the DOD cost basis to be able to show her actual gain/loss for her month of ownership. Plus, the IRS has the Form 1099-B so its computers will try to match to her return.

Get the DOD values for each of the sales from her ML stock broker. In fact, have him print her gain/loss statement using the DOD cost basis for each transaction. He should upload it to a ML portal and give you access. Download it to your computer. Then you have the documentation you need to prepare her return and to include in her tax folder for her to keep. Also, save a copy of her ML gain/loss statement in your electronic file for your client, just in case she gets any IRS correspondence that you will respond to for her.

[Pacun]

I thought that when you inherited stock, you start wearing the shoes of the deceased. Meaning, no step up basis and you inherit the gains and loses also. 

[DANRVAN]

50 minutes ago, Pacun said:

inherited stock, you start wearing the shoes of the deceased. Meaning, no step up basis

 

You "step into the shoes" of the decedent for assets producing income in respect of the decedent, IRD.  IRD includes such items as: installment notes receivable, IRA accounts,....... investments in annuities.

[Catherine]

Stock gets basis stepped up as of date of death (in normal cases). It's gifts where the basis travels to the new owner, @Pacun.

[michaelmars]

ignore the term, all inherited stock sales are considered LONG TERM

[mcb39]

On 4/11/2023 at 11:27 AM, cbslee said:

The stock market has been pretty volatile, there is an equal chance of significant price changes.

And, Inherited, is one case where she could possibly have a LT Capital loss.  I have a client who will never outlive her carryforward $3000 a year loss.

[Catherine]

13 hours ago, mcb39 said:

I have a client who will never outlive her carryforward $3000 a year loss.

I had one where I thought that for sure - until the client sold a patent some years later. Wiped out the whole kit and caboodle of the loss!

[mcb39]

That would be rare and amazing.  My client is carrying a $200,000 carryover loss on the sale of an inherited house.

[Lee B]

1 minute ago, mcb39 said:

That would be rare and amazing.  My client is carrying a $200,000 carryover loss on the sale of an inherited house.

I can't even imagine how that could have happened?

[mcb39]

4 minutes ago, cbslee said:

I can't even imagine how that could have happened?

Before she became my client, which is many years ago; she inherited a $600,000 house from her father and sold it for approximately $400,000 just to get rid of it because it was standing empty.  They wipe some of it out with CG; the most prominent one two years ago when they sold a Rental property.  They still have a lot of CL left.  Even more astonishing; WI  only allows a $500 CL per year.  They are a nice couple who are secure as one can be these days.  They have invested wisely and live a happy, but not ostentatious life.  They winter in AZ and come home in April.  I have to say that when they first came to me, I was as intimidated as I have ever been.   I thought they were way out of my league.  That is no longer true.  They trust me explicitly and I value them as clients.

[DANRVAN]

6 hours ago, mcb39 said:

she inherited a $600,000 house from her father and sold it for approximately $400,000 just to get rid of it because it was standing empty. 

 

That raises a couple possibilities. 

 

(a) The house could have been overvalued by $200,000   or

 

(b) The house was sold for less than FMV and the difference should have been reported as a gift.

[mcb39]

11 hours ago, DANRVAN said:

 

That raises a couple possibilities. 

 

(a) The house could have been overvalued by $200,000   or

 

(b) The house was sold for less than FMV and the difference should have been reported as a gift.

I cannot clarify that as she came to me with the Carryover loss already established and I don't know the particulars of the story.  They have been with me for several years and have never been questioned by the IRS since I have known them.

[Catherine]

There have been some nasty collapses in real estate market. If house was appraised in 2007 and then sold in 2009 or 2010, that would do it, easily.

[JJStephens]

Part of what I love about this forum is the never-ending stream of fascinating situations and (I say this sincerely) brilliant responses! If there were a John Grisham for tax law, that person could have a never ending supply of plot lines just from reading the intriguing stuff posted here.

[Yrags]

So, back to this topic. I have a question about proper reporting. I also have mucho sales of inherited stock. I created a spreadsheet showing the reported basis and the basis as of the DOD.

On Line (e) Basis, do I put the DOD value, or the reported (earlier) value, with a code in line (f) and an adjustment in (g)? If a code, which code? I can see using (B) Basis Shown is Incorrect, or (O) All Other Adjustments. I looked in the 8949 Instructions, and it's a little unclear, as it does mention doing either but does not mention specifically when inherited property.

Thanks!

[BrewOne]

For 8949 entries, I would just plug in the DOD valuation for cost basis.  You have your spreadsheet in case the IRS questions the difference between what the broker reported and what you entered.  My experience is that as long as the stock sales match IRS numbers, they are not going to get involved without some other type of trigger/red flag.

[Margaret CPA in OH]

In ATX in the input sheet under (a) Transaction type you can choose 13, Inherited Property.

[jklcpa]

10 hours ago, Yrags said:

So, back to this topic. I have a question about proper reporting. I also have mucho sales of inherited stock. I created a spreadsheet showing the reported basis and the basis as of the DOD.

On Line (e) Basis, do I put the DOD value, or the reported (earlier) value, with a code in line (f) and an adjustment in (g)? If a code, which code? I can see using (B) Basis Shown is Incorrect, or (O) All Other Adjustments. I looked in the 8949 Instructions, and it's a little unclear, as it does mention doing either but does not mention specifically when inherited property.

Thanks!

If the basis was NOT reported to IRS, then you would enter the basis at DOD from your worksheet. No code or adjustment is needed in this case.

If the basis WAS reported to IRS, then enter the basis shown on the 1099B and enter code "B" in col (f) and enter the adjustment to basis in col (g).  Code "B" is for incorrect basis reported to IRS.

For either case, use "inherited" for date acquired and all of those sales will all be considered long-term.

[BulldogTom]

2 hours ago, jklcpa said:

For either case, use "inherited" for date acquired and all of those sales will all be considered long-term.

In ATX, it would actually be "Transaction Type" of "Inherited" that you select to get you the "Long Term" tax treatment.   The date acquired and the date sold will be the actual date you inherited and the date sold.   Transaction type overrides date input in ATX.  

It may be different in Drake or other software.

Tom
Longview, TX

[Catherine]

4 hours ago, BulldogTom said:

It may be different in Drake or other software.

In Drake, you put "INHERIT" in the acquired field and it forces long term treatment.