Question

Just prior to a major operation, Cody gives his son, Martin, stock in Robin Corporation (fair market value of $1,581,000 and basis of $2,213,400). At the time of the gift, Cody held some unused capital losses. The surgery is unsuccessful, and after Cody’s death, Martin sells the stock for $2,434,740.

a. What is the income tax result for Martin?

b. What if the gift had not been made and the stock passed to Martin as a bequest from Cody?

Answer 1

a. When Valuing a gift of stock of capital gain tax liability, it's the donor's cost and holding period that is taken into consideration.Threfore, the cost of shares in the hands of Martin will be $2,213,400.

Sale price $2,434,740

(-)Cost price $2,213,400

Capital Gain $ 221,340

b.When you inherit stock, the cost basis on the shares changes. Instead of using the cost that the former owner paid, your cost basis is the share value on the date the former owner died.

Sale price $2,434,740

(-)Cost price $1,581,000   

Capital Gain(Always long term) $853,740