How are inherited stocks taxed when sold

My uncle died a few months ago and left me some stock he purchased in the 1970s. I’d like to sell some of it, but I am worried about taxes. If I sell it, will I be taxed on the increase in value since he bought it or on the gains since he passed away?

The cost basis for inherited stock is usually based on its value on the date of the original owner’s death, whether it has gained or lost value since he or she purchased it. If the stock is worth more than the purchase price, the value is stepped up to the value at death. For example, if your uncle purchased the stock for $1,000 and it was worth $30,000 when he died, and you then sell it for $32,000, you’ll be taxed only on a $2,000 gain. If the stock loses value after your uncle dies -- say, it drops to $27,000 -- then you’ll be able to deduct a $3,000 loss.

If the stock had lost value since the original owner purchased it, the basis is adjusted down to the value at death. That means you can’t write off the loss that occurred while he was alive. Say he bought the stock for $1,000 but it was worth just $500 when he died. Your basis will be $500. If the stock is worth $1,200 when you sell it, you’ll be taxed on a $700 gain.

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All inherited stock qualifies for the lower rates on long-term capital gains, no matter how long you hold it -- even if you hold it for less than a year after your uncle’s death. Losses on the sale of your stock can offset gains on the sale of other investments dollar for dollar. If the losses exceed all of your capital gains for the year, up to $3,000 of the excess loss can be deducted against other kinds of income.

In most cases, the cost basis is set as the stock’s value on the date of the previous owner’s death, but sometimes the executor of a large estate who files an estate-tax return can choose to set the basis at the value six months after the owner died.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.

Question: I inherited some shares five years ago, which are lying in my demat account. I am planning to sell these shares now. Since I have not incurred any cost, will the full amount realised on the sale of these shares be taxed as my capital gains? 

Answer: No, the full value of the sale proceeds will not be taxed, as your capital gains are in your hands. Even though your cost of acquisition for inherited shares is nil, you will still get a deduction for your deemed cost of acquisition. For the computation of capital gains, the deemed cost of acquisition for the seller in the case of assets received as a gift or inheritance is the cost of the previous owner, who had actually paid for it. I presume that the shares in your demat account are listed equity shares. As your total holding period and that of the previous owner who paid for it exceeds one year, the profits on the sale of such shares would be considered as long-term capital gains. If you sell the shares through a stockbroker on the platform of an Indian stock exchange where securities transaction tax (STT) is paid, the profits will be taxed at a flat rate of 10 per cent without indexation after the first Rs 1 lakh of long-term capital gains on which no tax is payable. The limit of Rs 1 lakh is to be computed for long-term capital gains on the sale of all listed shares and equity-oriented schemes taken together.
For assets acquired prior to April 1, 2001, the fair market value as on April 1, 2001 can be taken as the cost of acquisition for the purpose of computing long-term capital gains. In the case of listed shares acquired before January 31, 2018 and on which STT has been paid, you get the benefit of grandfathering, under which the market price of the shares on January 31, 2018 is to be taken as the cost of acquisition if it is higher than your deemed cost of acquisition.

Question: Up to what amount can parents make gifts to their children, and up to how many times in a year? 

Answer: Parents can make a gift of any amount to their children without any limit. Likewise, you can make as many gifts as you want during a year. Please note that though there is no upper monetary limit up to which parents can make gifts to their children, one cannot make a single gift of more than Rs 2 lakh at a time in cash. If the gift is made to a minor and your purpose is to reduce your tax liability, it will not serve your purpose because the income of a minor from all the passive sources is required to be clubbed with the income of the parent with the higher income.

Balwant Jain is a tax and investment expert.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)