3

I was watching a YouTube video by TechLead, and he said that in USA, if a house or stock is passed down as inheritance, then it has an adjusted cost basis of when the person passed away.

So as an example, if Person A bought a house at $300k and 10,000 shares of stock at $10 / share (total $100k) 30 or 50 years ago, then let's say before Person A passes away, if he sells the house and the stock (say the house is $1M and the stock is $500k), then he will have to pay capital gain tax, naturally.

But if he passed away and passed the house and stock to the offspring, then he pays no capital gain tax, no inheritance tax (except in 6 states), and the person who inherits them doesn't pay any tax when he receive the inheritance, and will have a new cost basis of the fair market value (FMV) at the time he receive the inheritance?

Is that true? If that is the case, then the person inheriting the house and stock can sell them, say, 3 months or 5 years later, and if there is no gain, pay $0 tax?

And let's say if the law doesn't change, and the house and the stock is passed down to 5 generations, some 400 years later, and the person who sells them also has no gain between the time he receives the inheritance and when he sells it, also pays $0 tax?

4

Is that true? If that is the case, then the person inheriting the house and stock can sell them, say, 5 years later, and if there is no gain, pay $0 tax?

And let's say if the law doesn't change, and the house and the stock is passed down to 5 generations, some 200 years later, and the person who sells them also has no gain between the time he receives the inheritance and when he sells it, also pays $0 tax?

Correct, so long as the stepped-up basis does not trigger estate tax and so long as certain exceptions do not apply.

From Title 26 U.S. Code § 1014.Basis of property acquired from a decedent:

(a) In General Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—

(1) the fair market value of the property at the date of the decedent’s death,
(2) in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section,
(3) in the case of an election under section 2032A, its value determined under such section, or
(4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.

  • so estate tax is on amount greater than $11.4 million as of 2019? Then (1) it sounds so tax-free when US seem to tax on everything (federal income tax, state income tax, county property tax, city sales tax) and (2) then there really is no "even distribution of wealth" as long as it is under $11M... so many people with $11M or less, they can pass down the wealth tax-free and even have the cost-basis adjusted? I thought US has many mechanisms to promote even distribution of wealth to have a more stable society, and the $11M tax free and adjusted cost-basis doesn't seem to help that – nopole Oct 3 at 20:20
  • 3
    "I thought US has many mechanisms to promote even distribution of wealth to have a more stable society, and the $11M tax free and adjusted cost-basis doesn't seem to help that." That is far off-topic for money.SE. Go ask politics.SE. – RonJohn Oct 3 at 20:30
  • @nopole Would it be odd if you had an heirloom that you passed down that was taxed each time it was passed down even though the recipient realized no financial gain from owning it? Either way, agree with RonJohn that the motivations behind the rules are off-topic. – Hart CO Oct 3 at 20:41
  • @HartCO I thought it would work the same as if it is not inheritance: an item or house or stock worth $100,000 and when passed down to Offspring 1, it is worth $500k and taxed as such, and so Offspring 1 can pay the tax or sell it and pay the tax (just like when an employee exercise the stock options -- have to sell and pay the tax). But if it is a "heirloom" (like a flower vase)... then forcing the sale would be not good, but at least the cost basis can keep at $100k instead of adjusting to $500k and skipping the capital gain tax on that $400k gain – nopole Oct 3 at 21:18
  • @nopole That's true, it could be set that way, but if the basis didn't get stepped up then the estate tax would apply less frequently. – Hart CO Oct 3 at 23:06

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.