Tax QuestionsQ. A relative recently died and left me some stock. How is the tax handled on this transaction? Do I pay the tax when I sell it? Her basis in the stock was very low.A. When you inherited the stock, you received what is commonly referred to as a stepped-up cost basis. That means your relative's low basis in the stock is forgotten, and instead, your new basis is the stock's value on the date of death. Technically, your cost basis is the average of the stock's high and low trading prices on the date of death, not the stock's closing price. If your relative died on a weekend or holiday, then a weighted average of the two nearest open market trading days is used to determine your cost basis. For instance, if your relative died on a Saturday, the average of the high and low trading price on Friday is multiplied by two-thirds, and the Monday high and low average is multiplied by one-third. The two resulting numbers are added together to arrive at the new cost basis. As a general rule, no taxes are due until you sell the stock unless your relative had a taxable estate, which in 2002 and 2003 is an estate over $1,500,000. And when you do sell the stock, you will have a short term capital gain or loss if you sell the stock within one year of your relative's death, or a long term capital gain or loss if you wait longer. Note: there are several exceptions to the general rules in this answer.  |
