John M. Hoffman & Associates CPAs

Frequently Asked Questions

Capital Gains and Losses

"What about capital gains on something I inherited - how does that work?"

This is very important and frequent question. When you inherit something, and that something was included in the decedent's estate, you get what is called a stepped up basis at the date of death value. That means that if your grandfather bought 100 shares of IBM in 1960 for $2 each and he died last week leaving you such shares in his will and they were worth $101 each (value at his date of death), your basis for determining gain or loss is $101 and not the $2 gramps paid. Even better, you get to treat these shares as being held for over 1 year. So any gain you might realize from the sale of these shares will be long term as well.

So what if instead of dieing with these stocks, gramps gave them to you, "what happens then?" you may ask. Perhaps not such a good idea gramps, as junior gets gramps basis of $2 and gramps may have to file a gift tax return.

The most misguided idea that we have seen was a situation like this where "gramps" wanted to sell the stock before he died so that "junior" would not be stuck with the capital gains tax when he inherits the stock.

So under the current income and estate tax laws dieing with appreciated assets and making gifts of things life cash makes the most sense. Understanding all of these complexities, helps to chart a course for financial success.