Stock basis question: The stock was purchased by the parent at $50 per share, appreciated to $75 at the parent’s death, and declined to $65 one year later. What is the client’s tax basis in the stock?

Stock basis question: The stock was purchased by the parent at $50 per share, appreciated to $75 at the parent’s death, and declined to $65 one year later. What is the client’s tax basis in the stock?

• A. $0 per share
• B. $65 per share
• C. $50 per share
• D. $75 per share

Answer: (D)

The key idea is that when property is inherited, the basis is stepped up to the asset’s fair market value on the date of death (unless an alternate valuation date is elected). That means the original purchase price doesn’t set the heir’s basis—the date-of-death value does. In this case, the stock’s fair market value at the parent's death was $75 per share, so the client’s basis is $75 per share. The subsequent drop to $65 does not change the basis; it only affects the gain or loss when the stock is sold. If the stock is eventually sold at $65, the sale would realize a $10 per share long-term capital loss, since inherited property is treated as held long-term for tax purposes. The $50 purchase price is relevant for the decedent’s tax history, not the heir’s basis.

The key idea is that when property is inherited, the basis is stepped up to the asset’s fair market value on the date of death (unless an alternate valuation date is elected). That means the original purchase price doesn’t set the heir’s basis—the date-of-death value does.

In this case, the stock’s fair market value at the parent's death was $75 per share, so the client’s basis is $75 per share. The subsequent drop to $65 does not change the basis; it only affects the gain or loss when the stock is sold. If the stock is eventually sold at $65, the sale would realize a $10 per share long-term capital loss, since inherited property is treated as held long-term for tax purposes. The $50 purchase price is relevant for the decedent’s tax history, not the heir’s basis.