Knowing the cost basis of your property is important for tax purposes, but proving cost basis can be difficult. Cost basis adjusts at death, so it is always a good idea to appraise your property when a joint owner dies.
What is Cost Basis?
Cost basis is the monetary value of an item for tax purposes. To calculate how much you owe in capital gains tax on property, you use the basis to determine whether an asset has increased or decreased in value.
For example, if you purchase a house for $150,000, that is the cost basis. If you then make improvements to the property, you may be able to increase the home’s cost basis.
Suppose that you make no improvements, and you later sell the house for $250,000. You will have to pay taxes on the $100,000 increase in value. (However, if the property is your principal residence, you can exclude up to $250,000 in capital gains, or up to $500,000 for a couple.)
What Happens to Cost Basis When a Property Owner Dies?
When a property owner dies, the cost basis of the property is "stepped up." This means the current value of the property becomes the basis.
For example, imagine you inherit a house that a family member had purchased years ago for $50,000. The home has increased in value over time, and when the family member who owned the property dies, the home is worth $250,000. You will therefore receive a step up from the original cost basis – from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.
When a joint owner dies, half of the value of the property is stepped up. For example, suppose a couple buys property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new basis of the property for the wife will be $250,000. That is, $100,000 (for the wife’s original 50 percent interest) plus $150,000 (for the other half passed to her at her husband’s death) = $250,000.
There are other scenarios that can affect a property’s cost basis as well as any capital gains taxes you may owe.
For example, your home may have decreased in value over time for some reason. This could have an impact on the cost basis.
Perhaps you are considering gifting a piece of property to your children. Should you transfer the home to your kids during your lifetime, or let them inherit it after you have died? How would this affect the cost basis? Also, what would the tax implications be of each option?
Either way, connect with an experienced estate planner to understand the best options for your unique circ*mstances. Professionals with expertise in this area can also assist you in creating a plan that avoids negative tax consequences where possible.
Proving Your Cost Basis
The burden is on the property owner to prove the cost basis. It isn't always easy to do, especially if a considerable amount of time has passed since the owner purchased the property or made improvements to it. Homeowners should keep good records of improvements they have made to a house, including keeping copies of all receipts and purchase orders.
If a joint owner of property dies, you should get the property appraised to show the value at the time it is stepped up in basis. Be sure to save the documentation so you can use it later.
Additional Resources
Again, a qualified estate planner can guide you on what your best options are in these situations. Search for an estate planning attorney near you today.
You may also benefit from checking out the following informative articles related to taxes and estate planning:
Created date: 10/20/2015
FAQs
Cost basis is the original value or purchase price of an asset or investment for tax purposes. It is used to calculate capital gains or losses, which is the difference between the selling and purchase prices of capital assets. Tracking cost basis is required for tax purposes.
How to prove cost basis to IRS? ›
This information is usually provided on a confirmation statement sent to you by your brokerage firm after you purchase a security. You're responsible for reporting your cost basis information accurately to the IRS, in most cases by filling out Form 8949.
How to figure out cost basis? ›
You can calculate your cost basis per share in two ways: Take the original investment amount ($10,000) and divide it by the new number of shares you hold (2,000 shares) to arrive at the new per-share cost basis ($10,000 ÷ 2,000 = $5.00).
What do I do if I don't know my cost basis? ›
If you know when the stock was purchased, here are some tips:
- Sign in to your brokerage account. ...
- Look at previous broker statements. ...
- Contact your brokerage firm. ...
- Go online for historical stock prices. ...
- Go directly to the source.
The basis of property inherited from a decedent is generally one of the following: The fair market value (FMV) of the property on the date of the decedent's death (whether or not the executor of the estate files an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return)).
What is an example of a cost basis? ›
Example of cost basis
You purchased 100 stocks for $1,000. A year after you purchased the stocks, the company split the stocks 2-for-1. Two years after you purchased the stocks, the stock price is $7 and you sell 100 shares. The initial cost basis per share is $10.
How does IRS verify cost basis real estate? ›
Third Party Records. If you don't have necessary records, the IRS will look to third parties for confirmation of the asset's cost basis. This can include pulling documents from banks, lenders and sellers to confirm the value of a real estate transaction or a personal property sale.
What is the cost basis rule? ›
Cost basis matters because it's the starting point for any calculation of a gain or loss. If you sell an investment for more than its cost basis, you'll have a capital gain. If you sell it for less, it's a loss. Calculating your cost basis is generally pretty straightforward, but there are exceptions.
What happens if cost basis is not reported to IRS? ›
If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.
Why does my 1099-B not show cost basis? ›
Traders who sell securities purchased prior to the dates listed above may not see cost basis information included on their 1099-B, or it may be incomplete. This doesn't mean the non-covered cost basis isn't reportable; rather, it's not required to be reported by a broker to the IRS.
When the basis for an asset is not established at the time of sale, it means that there is no documented record of the original cost or value of the asset. In such a scenario, the IRS typically assumes a basis of $0. This implies that the entire amount received from the sale is considered as gain, subject to taxation.
How do you prove a basis? ›
In order to show that B is a basis for V, we must prove that V=Span{v1,v2,…,vm}. If not, then there exists some vector vm+1 in V that is not contained in Span{v1,v2,…,vm}. By the increasing span criterion Theorem 2.5.
How do you establish cost basis for inherited land? ›
The cost-basis figure usually equals the fair market value when the estate owner dies or the assets are transferred. A "step-up" basis means the cost basis is raised to the asset's market value on the original owner's date of death for tax purposes.
Does the IRS know when you inherit money? ›
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
What happens if cost basis is not reported to the IRS? ›
If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.
What happens if 1099-B does not show cost basis? ›
How can we help? The Form 1099-B that you receive might only report the sale date and sales proceeds. If it does not report the date acquired or cost basis, you still need to enter that information when you report your Form 1099-B in the TaxAct program so that it will transfer to Schedule D and/or Form 8949.
Which tax form reflects cost basis information? ›
Current cost basis information, including information about realized gains and losses, is included on Form 1099-B for taxable accounts. The non-covered cost basis will display in the non-covered section of the form but won't be reported to the IRS.
When did cost basis start being reported to IRS? ›
Tax Matters
In 2008, Congress enacted mandatory cost basis reporting for brokers and mutual funds.
Knowing the cost basis of your property is important for tax purposes, but proving cost basis can be difficult. Cost basis adjusts at death, so it is always a good idea to appraise your property when a joint owner dies.
