Your parents had the best intentions.
Unfortunately, Uncle Sam could care less what they INTENDED.
A common financial mistake is gifting investments (including rental property) to children while the parents are still alive.
This counts as a gift and the kids will “inherit” the parent’s cost basis.
That $1,000 your mom invested in Apple stock in 1984 is now worth $1.1M.
Nice job, Mom! But here’s the tricky part.
If Mom gives you those shares while she’s still alive, YOUR cost basis will be $1,000, and you’ll pay about $200,000 in capital gains taxes when you sell it.
If, however, you INHERIT those shares after Mom has passed away, your cost basis is $1.1M and you’ll pay $0 in capital gains if you sell.
It’s called a step-up in basis. The cost basis for most investments when inherited becomes the Fair Market Value on the date of death, no matter what the deceased’s cost basis was.
Don’t assume your parents know how this stuff works. It’s a very common mistake, so make sure to give them a heads up NOW.
Your parents don’t need your permission to transfer anything INTO your accounts, so you could wake up tomorrow to a nice email from mom and dad telling you about all the money they transferred into your account and then it’d be too late…
…once it’s in your account, you can’t undo it.
You’ll inherit their cost basis, no matter what their intentions.
The road to irreversible taxes is paved with good intentions
