Stepped-up cost basis for inherited NUA stock?
Hello, could someone please assist with calculating the appropriate cost basis (or partial stepped-up cost basis) & which would be the correct LT Capital Gain calculation for the following NUA stock sale situation (items 5a-5c below):
1) Original Cost Basis of Company Stock in a 401(k): $20
2) At time of distribution out of 401K & into father’s taxable brokerage acct: FMV $150 (NUA=$130).
3) No NUA stock was sold prior to father’s death 2+ yrs later
3) At date of death (DOD), FMV of stock = $250, surviving spouse inherits all the NUA stk (in-kind), currently reported as uncovered shrs in her new brokerage acct with $250 stepped-up basis (which we know is wrong…)
4) Is there a stepped up-cost basis for the surviving spouse/heir, and if so, what would it be? Is there a basis step-up allowed for the stock appreciation from distribution date to date of death, calculated as: (250-150)+20= $120 new stepped-up cost basis for the NUA stock?
5a) If yes, what happens if NUA stock is sold a year after DOD for $200? Is the final LT Capital Gain calculated as $200-$120 = $80 (report LT CG for sale of NUA stock at LESS THAN original deferred NUA amount of $130)?
OR…..
5b) Do you have to maintain/recognize the original NUA amount on stock sale (since stk didn’t fall below original $150 FMV at distribution??)and still report up to $130 as LT CG on the sale of stock at $200? Calculate LT CG as $200-$70 = $130 (impute a stepped-up cost basis #?)
OR….
5c) Is there absolutely no basis step-up allowed for inherited NUA stock, so LT CG would be calculated as $200-$20=$180?
Based on what I have read elsewhere, I think #5a (or maybe #5b…) is the right answer, but I can’t find anything official (in IRS regs, etc.) to confirm it. Neither brokerage co. nor current CPA are familiar with inherited NUA stock basis calculations, especially when stock price has decreased since my father’s death. Thanks in advance for any help you can provide with this issue!
Permalink Submitted by Alan - IRA critic on Mon, 2023-11-06 15:42
5b is correct except it overlooks the LT loss that occurred after inheriting the shares.Therefore, there should be LT gain of 130 emanating from lack of basis adjustment for the NUA per share and a LT loss of 50 that occurred after inheriting, with a net LT gain of 80.The tougher part is actually reporting this on Form 8949. Seems like there should be IRS guidance on this somewhere, but I have not found it, not even for the simpler situation when the participant sells NUA shares. Perhaps it would be easier to net this out and simply report the sale proceeds of 200k with a cost basis of 120 (comprised of the 70 basis adjustment plus the 50 loss) for the net LT gain of 80, with an explanatory statement how the cost basis was derived.
Permalink Submitted by David Mertz on Tue, 2023-11-07 01:14
I came up with essentially the same thing, but I think that the $130 is Income in Respect of a Decedent that would not be apparent if everything was just netted out. The amount of IRD would be relevant to the beneficiary if the decedent was subject to estate tax and the beneficiary could take a deduction for the proportionate amount of estate tax paid on the amount of IRD that was included in the gross estate.
Permalink Submitted by Katrina McMurtrie on Tue, 2023-11-14 05:37
Thank you for both responses! There was no estate tax return filed at my father’s death – total estate was > $1mil. So nothing to report on estate tax return in regards to NUA. Yes, I am thinking the $80 LT CG for the sale is the correct answer (so we don’t ever recognize the entire amount of the original $130 NUA if we sold at 200? as shown in example 5b above) and maybe we can get away with an explanatory statement on the form 8949 backing it up by reporting the cost basis calculations to reflect the original NUA amount & stepped up basis adjustment vs net amounts….thank you for the suggestion.Our issue right now is that all of the NUA stock is still unsold (mainly because we don’t know how to value it for tax purposes) and it’s all currently being reported in mom’s VG brokerage acct as uncovered shares at the DOD stepped-up basis of $250/shr (so currently reporting a large unrealized capital loss) . They do give us option to file a form to update the cost basis of uncovered/inherited shares, so debating if we should just go ahead and file it, giving them the updated $120 stepped up cost basis for the stock instead (vs the original $20 pre-death cost basis) – making it easier to determine the capital gain/loss when she finally sells the NUA stocks to further diversify her investments into a more conservative asset mix for her 75+ age (the NUA stock holdings value is currently 24% of her total investments…not good). We would feel better about doing this if we could just find something definitive from the IRS (or even an experienced CPA or financial advisor in these matters), that directly addresses this & confirms the limited stepped up cost basis amount of $120 in 5b above is the proper accounting for it.Thoughts on this? Should we go ahead and update stock cost basis share price on VG, knowing we have the backup detail for the amount to use for an Form 8949 explanatory stmt later?
Permalink Submitted by David Mertz on Tue, 2023-11-14 12:44
Being noncovered shares, the brokerage is not required to put the cost basis on the Form 1099-B. Anything they do put in boxes 1b, 1e, 1f, 1g and 2 is not required to be correct and can be ignored, so having the brokerage update the cost basis is really for your own information. When the checkbox in box 5 is marked to indicate that the form is reporting the sale of a noncovered security, I can’t imagine that the IRS would complain about the tax return showing a lower cost basis on Form 8949 than is shown on the Form 1099-B.
Permalink Submitted by Katrina McMurtrie on Sun, 2023-11-19 19:47
We would actually like to update the cost basis of the uncovered NUA shares with the brokerage so that anyone can reference cost basis & unrealized gain/loss on the stock easily on the VG site to help with potential tax-loss harvesting (?) and stock sale decisions. Unfortunately, I am the only one in our entire family who kinda understands this stuff (as we still can’t find a CPA or anyone at VG that does), hence the motivation to get it updated on the VG site in case I’m not around someday, lol. I have my backup calculations laid out on a shared Excel worksheet, but don’t expect my mother or anyone in the family to understand it. Was just hoping to find something concrete in IRS regs or otherwise related to this situation. Most info I find online is related to non-inherited NUA situations or involved in an estate tax situation – neither of which applies here. Thank you for your reply!