Ask Mr. Doherty a Question:
Do you have a question about wills or trusts? Financial planning matters? Insurance or other financial products? Mr. Doherty might be able to provide some assistance.
Members of The Society can submit financial and estate planning questions directly to Mr. Doherty. Join today to benefit from this unique service.
The following are examples of questions on legal and financial matters that have been submitted to Mr. Doherty:
The recent turmoil in the stock market has me thinking I ought to put my money into precious metals, like gold. But one of my buddies told me that gold doesn’t qualify for capital gains treatment. Could that possible be correct?
- Al in Miami
Yes and no. I suspect you are hoping that your friend is completely wrong so you can give him the raspberries, but his observation is partly accurate. Gold (that is, bullion or coins), is considered a “collectible,” which triggers a top long-term capital gains rate of 28% -- rather than the normal 15%. So, gold is eligible for capital gains treatment, but the tax rate is higher. So, your friend is half right. But not all is lost as you can still invest in gold and get the benefit of the 15% long-term capital gains rate by investing in gold mining companies, or in mutual funds that are devoted to precious metals. Historically, the share prices of such investments are very closely related to the price of gold.
My understanding is when you inherit real estate from someone, you get a “step-up” in basis, which works out to the fair market value of the property at the time the person died. What if the property went down in value? Is there such a thing as a “step down” in basis?
- LLJ, Oklahoma City
First of all, the basis adjustment rules apply to all property acquired from a decedent – not just to real estate. So, if your Aunt from Alabama left you all the stock she had amassed in a company over a period of 40 years, and her basis (or tax cost) in that stock was just $25,000 – but at the time of her death the fair market value of the stock was $600,000 – your basis is $600,000. That means you can liquidate the stock for $600,000 and the income tax implication to you is ZERO. Because the sale price equaled your tax cost. It is treated the same as buying an asset for $X, and selling it later for $X. There is no gain on the transaction.
Yes, an opposite result ensues, which the tax law recognizes, if the property declined in value during the time the decedent owned it. The basis of the property in the hands of the decedent’s heir is the fair market value of the property on the decedent’s date of death (or an alternative date, six months after date of date). Whatever value is assigned to the asset becomes the heir’s basis in the asset. So, if the decedent acquired a parcel of real estate for $500,000, and at the time of her death it had a fair market value of $400,000, then the heir’s basis is $400,000.
Take a guess at the ultimate tax result in the loss situation. Remember, in the increase in value example, the heir can sell the highly appreciated asset and there is no income tax implication. If there is depreciation in the value of the asset, can the heir claim a loss deduction? No! Any potential loss deduction is eliminated once the property passes to the heir.
