carryover_basis [CapiPedia]

This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong.
======Carryover Basis======
Carryover Basis is a tax rule that determines the cost of an asset for the person who receives it as a gift. In simple terms, when you are gifted an asset (like stocks or real estate), you also inherit the original owner's [[cost basis]]. This "carried over" basis is what you'll use to calculate your [[capital gains]] or losses when you eventually sell the asset. Think of it like a financial baton pass; the original owner's purchase price and holding period are passed directly to you. This is starkly different from what usually happens with inherited assets, which typically receive a [[stepped-up basis]]. The distinction is crucial because a low carryover basis on a highly appreciated gift can leave the recipient with a significant future tax bill. Understanding this concept is fundamental for both thoughtful gift-giving and savvy receiving, forming a key piece of personal finance and [[estate planning]] puzzles.
===== How Carryover Basis Works =====
The logic is straightforward, but its consequences can be huge. The tax authorities want to ensure that [[capital gains]] tax is eventually paid on an asset's appreciation. By forcing the recipient to adopt the giver's original cost, the government keeps the eventual tax liability alive and well.
==== The Gift Scenario: A Present with a Past ====
Imagine your aunt bought 100 shares of a company for $10 per share, making her total [[cost basis]] $1,000. Years later, the stock is flying high at $150 per share, and the position is now worth $15,000. She decides to gift these shares to you for your birthday.
Your [[cost basis]] in these shares is //not// the $15,000 [[fair market value]] on the day you received them. Instead, thanks to the carryover basis rule, you inherit your aunt's original $1,000 basis.
If you decide to sell the shares immediately for $15,000, your taxable [[capital gain]] isn't zero. It's calculated as:
  * Sale Price: $15,000
  * Your Carryover Basis: $1,000
  * **Taxable Gain: $14,000** ($15,000 - $1,000)
This is a classic example of a gift coming with financial strings attached—in this case, a future tax bill.
==== The Inheritance Scenario: The "Stepped-Up" Exception ====
This is where things get interesting for investors. While carryover basis is the rule for gifts //between living people//, a different, much more generous rule typically applies to assets passed on after death: the [[stepped-up basis]].
Under [[stepped-up basis]], if you inherit that same stock after your aunt passes away, its basis is "stepped up" to the [[fair market value]] on the date of her death.
Let's use the same numbers:
  * Aunt's Original Basis: $1,000
  * Value at Death: $15,000
  * Your Inherited Basis: $15,000 (This is the stepped-up basis)
Now, if you sell the shares for $15,000, your taxable gain is zero! The $14,000 of appreciation that occurred during your aunt's lifetime is legally wiped away for tax purposes. This is one of the most significant tax advantages in the U.S. tax code.
//A historical note:// While the [[stepped-up basis]] is the long-standing norm for inheritances in the U.S., Congress did briefly replace it with a carryover basis system in 2010. However, it was retroactively repealed, and the [[stepped-up basis]] has remained the law of the land since.
===== Why Value Investors Should Care =====
Understanding the interplay between carryover and [[stepped-up basis]] isn't just for accountants; it's a powerful tool for long-term, multi-generational wealth building.
  * **Know Your True Cost:** If you receive a gift of stock, don't be fooled by its current market price. You must find out the original purchase price from the giver. That's your true basis, and it's the number that dictates your future tax liability.
  * **Strategic Gifting vs. Bequeathing:** For those planning their estates, the choice is clear. Gifting a highly appreciated asset during your lifetime saddles your loved ones with a large, embedded [[capital gain]]. In contrast, holding onto it until death allows them to inherit it at a [[stepped-up basis]], effectively erasing that tax liability.
  * **The "Die With Your Winners" Strategy:** This tax rule gives financial weight to the old investing adage. From a purely tax-efficiency standpoint, the best strategy for highly appreciated assets you intend to pass on is to never sell them. By holding them until death, your heirs can benefit from the [[stepped-up basis]], maximizing the value of their inheritance. It's a cornerstone of effective [[estate planning]] and a key reason why [[Warren Buffett]] has famously said his favorite holding period is "forever."