Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Cost basis
Posted by: etelle, March 21, 2009 11:53PM
Can someone help with this cost basis question?

Here is the scenario:

1. A man buys stock, and holds the shares in a brokerage account.
2. 10 years later he marries and then changes the brokerage account to be joint with his spouse.
3. 20 years later he passes away.
4. 5 years later his widow sells the shares, and would like to know what her cost basis is.

Thanks.

Re: Cost basis
Posted by: Art, March 22, 2009 01:07AM
Depends on whether this is all in a communityproiperty state in which case her basis is date if death value, or not, in which case half the basis is date of death value and other half is her original basis.

Assuming the stock was made joint when worth more than his original basis, her original basis is half his former basis.

Example: His original basis is 64

When price reaches 80 he gifts half to her. Her basis is 32.

Value of date of death is 100.

Her new basis is 32 + 50 = 82.

Re: Cost basis
Posted by: kaneohe, March 22, 2009 02:14AM
Art....

I live in a community property state (CA). I was under the impression that step up in basis upon 1st death depended on titling.....if titled as community property or in name of jt living trust, then full step up in basis. If JTWROS, then only half would be stepped up. Perhaps someone else can vote on this.

joint tenancy with spouses
Posted by: jainen, March 22, 2009 02:21AM
>>If JTWROS, then only half would be stepped up<<

Generally California courts interpret joint tenancy with spouses to be equivalent to community property if the facts demonstrate an intention to share the asset as community property.

Re: Cost basis
Posted by: etelle, March 22, 2009 02:32AM
Art,

Thanks for the reply.

We live in Ohio, so community property doesn't apply.

Would that change your answer?

Might she be entitled to the DOD stepped up value, if it were not for the fact that he changed the brokerage account to be joint?

Wouldn't she have owned half the shares during the husband's lifetime as a result of the account being joint? If so, would 1/2 her shares be at the husband's orginal cost basis and the other 1/2 be at the DOD value?

Thanks.

Re: Cost basis
Posted by: Herb, March 23, 2009 05:41AM
etelle Wrote:
-------------------------------------------------------
> Art,
>
> Thanks for the reply.
>
> We live in Ohio, so community property doesn't
> apply.
>
> Would that change your answer?

His answer covered both eventualities already.

>
> Might she be entitled to the DOD stepped up value,
> if it were not for the fact that he changed the
> brokerage account to be joint?

If the shares were solely titled in his name, then the wife inherits at 100% of DOD, That could be a stepup or a stepdown from original basis.

>
> Wouldn't she have owned half the shares during the
> husband's lifetime as a result of the account
> being joint?

In general, that is probably true.

If so, would 1/2 her shares be at the
> husband's orginal cost basis and the other 1/2 be
> at the DOD value?

Assuming she inherits ALL the shares, that is true.






half interest in each
Posted by: jainen, March 23, 2009 07:31AM
>>Wouldn't she have owned half the shares during the husband's lifetime as a result of the account being joint?<<

More exactly, she would have a half interest in each of the shares. So instead of owning half the shares at original basis and the other half at d.o.d. value, all the shares have identical basis, the sum of half the original cost plus half the d.o.d. value.

Re: half interest in each
Posted by: etelle, March 24, 2009 10:29AM
Actually, I'm conflicted about this.

If I were to buy shares at different times and then sell a portion of them, I get to declare how I calculate the cost basis.

It could be an average, first in first out, last in first out, etc.

Isn't this the same type of situation?

Re: half interest in each
Posted by: Art, March 24, 2009 09:28PM
It's more complicated than that.

First, if you wish to decide which specific shares you sold, you have to declare that at time of sale and have the broker acknowledge your request.

Second, the use of cost averaging (there are two types of cost averaging) is available form mutual funds, but not for ordinary stocks.

And once you use averaging for a fund, you must stick with averaging for that fund from then on.

So I would answer no, this is a different situation, one where the cost basis is determined by property inheritence rules. As all inherited property was inherited at the same time, your examples do not seem applicable to this situation.

Re: half interest in each
Posted by: etelle, March 25, 2009 12:41AM
I have no idea what the broker did when the shares were sold. Is it possible that he didn't declare any cost basis, and what would the assumption be in that case?

Since the husband purchased the shares before he married, and then later changed his brokerage account to be joint with his wife, she assumed his original cost basis on the half he gave her during his lifetime. After he passed away, the other half went to her at the stepped up d.o.d. cost basis.

She recently sold part of the holdings, and is now trying to establish the cost basis.

I haven't found an IRS publication that addresses this issue.

I did see that when selling shares acquired through a dividend reinvestment plan, there is a requirement to use first in first out.

Re: half interest in each
Posted by: Herb, March 25, 2009 10:23AM
etelle Wrote:
-------------------------------------------------------
> I have no idea what the broker did when the shares
> were sold. Is it possible that he didn't declare
> any cost basis, and what would the assumption be
> in that case?

Determining the cost basis of the stock shares sold is not the job of the broker. Selling those shares for his client is the limit of his responsibility and reporting those Gross Proceeds on form 1099-B. There is no box for Cost Basis on that form, as that determination is the responsibility of the investor/purchaser.

>
> Since the husband purchased the shares before he
> married, and then later changed his brokerage
> account to be joint with his wife, she assumed his
> original cost basis on the half he gave her during
> his lifetime. After he passed away, the other half
> went to her at the stepped up d.o.d. cost basis.

Actually, she never owned "half" the shares in the joint account. She may have owned a 50% interest in ALL the shares. After death, the cost basis of EACH share of stock changes to a hybrid value consisting of half the original cost basis (usually purchase price) and half the DOD value (which may or may not be higher).


> She recently sold part of the holdings, and is now
> trying to establish the cost basis.

Since these are stock shares, her choices are limited to "specific identification" or FIFO. Specific Identification has to be declared at the time of sale, and confirmed in writing by the broker. The OP has not indicated that this was done.

That leaves FIFO (original shares, more purchases, and reinvested dividends) and will require that she determine exactly WHICH shares were sold. Then apply the cost basis calculation to each share [(original basis + DOD value)/2] and sum them up.


> I haven't found an IRS publication that addresses
> this issue.
>
> I did see that when selling shares acquired
> through a dividend reinvestment plan, there is a
> requirement to use first in first out.

You must has misread something. There is no such requirement.




Re: Cost basis
Posted by: etelle, March 25, 2009 11:06AM
Thanks for the in-depth answer.

What does someone do when shares were bought a long time ago by someone else and the current owner doesn't know the purchase dates or prices?

She says that they switched brokers somewhere along the way and didn't keep track of cost basis when they did it.

This is what she wrote to me:

He purchased the shares in "batches" over a number of years ... 50 here ... 100 there, etc. At least two of the brokerage firms where he bought shares are no longer in business (Olde) ... Merrill Lynch (weren't they bought out?? In any event, I can't find any record of all the shares. I found a certificate for 120 shares and another one for 50. There are now 3500 shares (of course, that includes all the stock splits). Doesn't it seem like this would happen quite often in estates and that type of situation where nobody knows when or where the shares were bought and/or sold??

This was what I was referring to with respect to the statement I made about dividend reinvestment:

[www.irs.gov]


Question: How do I compute the basis for stock I sold, when I received the stock over several years through a dividend reinvestment plan?


Answer: The basis of stock that you received through a dividend reinvestment plan:

Is the cost of the shares plus any adjustments, such as sales commissions.
If you have not kept detailed records of your dividend reinvestments, you may reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.
The basis must be determined by using the first-in first-out rule if you cannot specifically identify which shares were sold.




Re: half interest in each
Posted by: DeeDee, March 25, 2009 06:22PM
The husband's share of the stock holdings have an easily determined basis -- one-half of the date of death value of the share holdings at that time. If you cannot determine the basis of the other one-half of the shares (wife's half) held at the time of the husband's death you can use a zero basis, hire someone to pull records to find the valuation or do some research and make a reasonable estimate. Given the questions in this thread, you may need some assistance with this. Hopefully, the widow has all the records of the holdings since her husband passed away five years ago. Those shares (since date of husband's death) belong to widow only and basis should be easily determined from the year-end broker statements. Have you looked at the records from the administration of the husband's estate for more information on the stock basis?

Re: half interest in each
Posted by: etelle, March 25, 2009 09:29PM
You're right. The cost basis for the half that the widow got from the estate is easy to determine.
The difficulty lies in how to determine the cost basis of the other half.
I was told that good records were not kept and there were stock splits, etc.



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