FOOL'S SCHOOL DAILY Q&A
Cost Basis of Inherited Stock
It's not the same as gifted stock

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By Selena Maranjian (TMF Selena)
February 20, 2002

Q.  How do I calculate the cost basis of stocks I inherit?

It can be confusing when you're lucky enough to inherit stocks. After all, you probably don't know the cost basis of the shares or even if you have a gain or loss.

First off, understand that there's a big difference between a gift and an inheritance (received from someone's estate). With a gift of appreciated stock or property, the basis (or cost, for tax purposes) is the same for the receiver of the gift as it was for the giver. So with gifts, you need to trace the cost all the way back to the person who originally owned it and gave it to you. This can sometimes be difficult.

With an inheritance, you get what is called a stepped-up basis for tax purposes. Your basis (i.e., cost) is the fair market value of the stock on the date of death of the donor.

The estate's tax return should disclose the value of the stock at date of death. Alternatively, if you know the date, you can get the stock price online at various sources -- or even by calling your broker or the company's investor relations department. Once you determine the value, back up your findings with a letter from the broker or the shareholder relations department. You'll need that information just in case the IRS wants to double-check (read: audit) your tax return.

Learn more about taxes in our Tax Center and at the IRS website.

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This question and answer is adapted from The Motley Fool Tax Guide 2002. For much more tax planning guidance, and tips that can save you hundreds or thousands of dollars, check it out!