Is it really true that the sale of inherited assets always results in a long-term capital gain/loss, regardless of holding period?

Yes, it is really true that the sale of inherited assets always results in a long-term capital gain / loss regardless of holding period. This is generally true but, as with all things tax-related, there may be nuances, exceptions, etc. that could apply to your specific circumstances (see caveats and disclosures at bottom – please consult a tax professional). No reason to be bored!

Let’s go through an example:

• Bill bought his house for $100K in 1990.
  • Q: What’s Bill’s cost basis in his home?
  • A: $100K

Scenario 1: Gifting

• Bill gifts his house to his son John in 2000 when the value of the home is $130K.
  • Q: What is John’s cost basis in the home he has just received from his dad as a gift?
  • A: $100K. “The basis follows the gift.” (also called carryover basis)

Scenario 2: Inheriting

• Bill dies in 2010, and his son John inherits the home on June 1. The market value of the home at the time of Bill’s death is $160K. (Bill’s costs basis is still $100K.)
  • Q: What is John’s cost basis in the home he has just received from his dad?
  • A: $160K. This is the “cost basis step-up” that happens when assets are inherited. The basis steps up to the current FMV as of the date of death.
  • Q: If John sells the home on July 1 (one month after inheriting) for $170K, how much is his capital gain?
  • A: $10K.
• So John has a $10K capital gain from selling the home on July 1 (one month after inheriting it).
  • Q: Is John’s $10K capital gain short-term or long-term?
  • A: It’s long-term. The sale of inherited assets ALWAYS results in a long-term capital gain (or long-term capital loss) REGARDLESS OF HOLDING PERIOD.

It doesn’t matter if John owns the home for 10 days or 10 years before selling. The capital gain (or loss) is ALWAYS long-term.

Additional Questions related to gifting

• • Q: When Bill gave his house (market value $130K) to his son John in 2000, did he have to file any special tax return? If so, which one?
  • A: Yes, he had to file a gift tax return (IRS Form 709).
  • Q: Did Bill or John have to pay any taxes with this gift tax return?
  • A: No, Bill (the donor) would not have to pay any gift tax unless he had already given away $12.92 million in assets. (That’s the lifetime gifting limit for 2023.)
  • Related question: how much can Bill give his son (or any individual) every year without having to file a gift tax return?
  • A: $17,000 in 2023.
  • Q: In this situation with Bill and John, from the perspective of taxes paid by both of them (combined), which is better: gifting the house or inheriting it?
  • A: Inheriting! The step-up in basis is a HUGE tax savings for John when he wants to sell the inherited home.
  • The take-away: if you don’t need to sell non-qualified, taxable assets (with capital gains), don’t!! The capital gain vanishes at death because of the step-up in basis for the heir(s).

The caveats and disclosures (there are always caveats and disclosures, aren’t there?!):

• We are not tax professionals, and this is not tax advice. We repeat: we are not tax professionals, and this is not tax advice. Are taxes complicated? Yes, indeed, they are – as well as contradictory and confusing. Your specific circumstances require their own specific analysis by a licensed tax professional. We recommend that you get that analysis if you have inherited assets.
• You know how most people don’t do their own surgery? Well, we encourage you to consider that same idea for your taxes. Unless you have a lot of experience with tax laws and their recent changes, we recommend that you hire a licensed tax professional for your tax reporting needs.
• You know how the weather changes from day to day? And often from minute to minute? Well, the same is true of tax laws. And so, as stated above (you know what’s coming next, don’t you?): we recommend that you use a licensed tax professional because the information provided above is NOT TAX ADVICE.
• Is there an error in our text above? (God forbid.) Some clarification or additional information you can provide on this topic? If so, please add it to the comments below. We are here to learn and grow and to support all in providing valuable financial planning information to people who need it. Your contribution in the comments is valued and appreciated.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

The examples are hypothetical and are not representative of any specific investment. Your results may vary.