With the "crash" of stock market prices in 2008, it is quite
possible that people who start to die will see a fair market
value on the date of death that may be less than the cost basis.
Am I correct that in this instance, there would be a step down in
cost basis and that the heirs would now own stock that has a cost
basis that is less than what the decedent paid?
I am aware of using an alternate date.
I suppose you could say there is, and it's called community property.
When a spouse dies owning community property, the entire value gets
stepped up, not just the half owned by the spouse who died.
...as long as at least half of the value of the community property
interest was includable in the gross estate of the decedent, right?
(according to Pub 551)
But step-down can apply here also. Suppose married couple M and N own
personal-use community property with basis of $100K, it drops to $80K
FMV overnight, resulting in N dropping dead from a heart attack, and M
inherits N's half. Then the market partially recovers, FMV rises to
$90K and M sells the property for that amount. Now M has $10K capital
gain instead of what would normally have been a $10K non-deductible
In the current economy, our T&E department is advising families that consult
concerning a terminally ill relative to sell all stocks in which the
has a loss. Otherwise, the step down in basis will wipe out the ability of
estate to recognize that loss for income tax purposes.
Jon Gallo, Los Angeles
Your last sentence implies that the decedent's estate will have
capital losses from the sale of assets before death. Any capital
losses that could not be used (excess loss beyond $3000) on the
final income tax return of the decedent is lost forever.
Does that mean it would be better for the elderly, while they are still
alive, to give away property with a value lower than their basis? The
basis would be transferred to the donnee, who would then be able to get
the benefit of the loss (well, eventually) if they sold.
In article ,
email@example.com (Stuart A. Bronstein) writes:
| > Your last sentence implies that the decedent's estate will have
| > capital losses from the sale of assets before death. Any capital
| > losses that could not be used (excess loss beyond $3000) on the
| > final income tax return of the decedent is lost forever.
| Does that mean it would be better for the elderly, while they are still
| alive, to give away property with a value lower than their basis? The
| basis would be transferred to the donnee, who would then be able to get
| the benefit of the loss (well, eventually) if they sold.
I thought that a gift whose basis in the hands of the donor was greater
than the FMV at the time of the gift acquired a dual basis in the hands
of the donnee such that while the donnee would not be penalized on a
phantom gain is he sold for more than that FMV (but less than the donor's
basis) neither would he be able to take a loss in that same range.
firstname.lastname@example.org (Stuart A. Bronstein) writes:
Yes, and IRS Pub 551 explains it this way:
Property Received as a Gift
To figure the basis of property you receive as a gift, you must
know its adjusted basis (defined earlier) to the donor just
before it was given to you, its FMV at the time it was given to
you, and any gift tax paid on it.
FMV Less Than Donor's Adjusted Basis
If the FMV of the property at the time of the gift is less than
the donor's adjusted basis, your basis depends on whether you
have a gain or a loss when you dispose of the property. Your
basis for figuring gain is the same as the donor's adjusted basis
plus or minus any required adjustment to basis while you held the
property. Your basis for figuring loss is its FMV when you
received the gift plus or minus any required adjustment to basis
while you held the property (see Adjusted Basis, earlier).
If you use the donor's adjusted basis for figuring a gain and get
a loss, and then use the FMV for figuring a loss and have a gain,
you have neither gain nor loss on the sale or disposition of the
You received an acre of land as a gift. At the time of the gift,
the land had an FMV of $8,000. The donor's adjusted basis was
$10,000. After you received the land, no events occurred to
increase or decrease your basis. If you sell the land for
$12,000, you will have a $2,000 gain because you must use the
donor's adjusted basis ($10,000) at the time of the gift as your
basis to figure gain. If you sell the land for $7,000, you will
have a $1,000 loss because you must use the FMV ($8,000) at the
time of the gift as your basis to figure a loss.
If the sales price is between $8,000 and $10,000, you have
neither gain nor loss. For instance, if the sales price was
$9,000 and you tried to figure a gain using the donor's adjusted
basis ($10,000), you would get a $1,000 loss. If you then tried
to figure a loss using the FMV ($8,000), you would get a $1,000 gain.
Could you (or somebody else) expand upon this a little bit?
This suggests to me that any non-deductible Capital Loss in the
decedent's final tax return *can* be used by in subsequent estate
income tax returns. Yes?
Are the capital gain/loss rules in estate income tax returns roughly
the same as those for the 1040? That is, carried forward capital
losses can be offset against net capital gains? And some portion of
unused capital losses can offset ordinary income?
How about capital gains/qualifying dividend tax rates in estate income
tax returns? More or less the same as the rates applied in a 1040?
Finally, how long can you keep an estate "alive" for tax return
purposes? With the market in the toilet and not a lot of prospects
for it to come roaring back in the next few years I would imagine it
could take years and years to use up a capital loss carryforward.
No, that is the wrong conclusion. Unused CL carryovers on the
decedent's final return are GONE. They do not flow to the estate, and
all assets transfer at their current FMV (no gain or loss).
Similar, but only with respect to capital losses generated after the
There are no carryover losses from the decedent.
Similar, but read the form 1041 instructions and review the form. It
might be better, taxwise, to distribute the gains and/or dividends to
the beneficiaries via form K-1, rather than having the estate pay the
Once again, THERE ARE NO CARRYOVER LOSSES FROM THE DECEDENT IN THE
ESTATE, so no need to keep an estate open hoping for "recovery".
Unused losses in the decedent's account are gone forever.
Suppose the carryover (carry forward) losses are (or were) in the past
tax returns for a married couple who have been filing jointly for a
number of years; and one spouse dies.
Is the entire carry-forward lost? Or only half?
My post did not address the issue of whether and which losses
carry over to an estate. I was simply trying to point out that
it is advisable for the decedent-to-be to recognize losses
in the year of death attributable to assets with a current fair market
value less than basis, since the step-down in basis at death wipes out THAT