Cost basis is the original cost of a property or asset, including the original purchase price plus any adjustments (for example, fees or commissions). Cost basis is used to help determine how much you owe in taxes when you sell your property or asset. In general, when you inherit property or assets, you get a step-up in cost basis.
A step-up cost basis is usually going to be the fair market value (FMV) on the date of your loved one’s death.1 If the executor files an estate tax return, they could use an alternate valuation date of up to 6 months from the date of death.2
When you sell an inherited asset for more than the stepped-up cost basis, it would be counted as a long-term capital gain for tax purposes. Your long-term capital gains are taxed at the capital gains tax rate, which is significantly lower than ordinary income taxes.
If you sell the asset for less than the FMV, it would be a long-term capital loss. The tax code allows you to deduct capital losses, and you can apply up to $3,000 a year ($1,500 if married filing separately) in capital losses to reduce ordinary income. If you have more than $3,000 worth of losses, you can carry the loss forward to use in future years.3
To make sure you are taking full advantage of your inherited assets, it’s best to work with a qualified tax advisor.
