Inheriting assets comes with significant tax implications — particularly around basis. Getting it right protects beneficiaries from paying more tax than they owe.
When someone inherits an asset — real estate, stocks, a brokerage account — the cost basis of that asset is generally stepped up to its fair market value as of the date of the decedent's death. This means that if you sell the inherited asset at or near its date-of-death value, you may owe little or no capital gains tax — even if the decedent held it for decades and it appreciated substantially.
This is one of the most valuable and most misunderstood aspects of inheritance tax law. Many beneficiaries — and some preparers — don't apply the step-up correctly, resulting in significantly overstated capital gains and unnecessary tax.
When a beneficiary sells inherited property, the holding period is automatically treated as long-term regardless of how long the beneficiary actually held the asset — meaning the lower long-term capital gains rates apply even if the property is sold the day after inheriting it.
The gain or loss is calculated as the difference between the sale proceeds and the stepped-up basis — not the original purchase price. We coordinate with the estate's records and appraisals to establish the correct basis figure before any return is prepared.
When an estate distributes multiple assets to multiple beneficiaries, or when assets are sold by the estate during administration, tracking the correct basis for each asset and each beneficiary requires careful coordination between the estate's Form 1041, the beneficiaries' K-1s, and the individual returns. We handle all of this as part of a coordinated engagement.