When the shares are sold, the taxable gain is equal to the sale proceeds minus the cost basis on the date of death.
As of 2012, long-term capital gains were taxed at a maximum rate of 15 percent.
The estate’s basis in property received as part of the liquidation equals the property’s fair market value. This effectively gives the estate a full basis step-up in the S corporation’s underlying assets even though the deceased shareholder only owned stock (and not the underlying assets) at the time of death.
This capital loss offsets the estate’s gain from the deemed sale (a wash for capital gain purposes).This technique is often helpful in situations where the S corporation’s assets need to be sold to pay debts, estate taxes, or to fund distributions.If there are multiple shareholders, however, the tax consequences to the surviving shareholders must be analyzed separately since they will not have the benefit of a basis step-up in their S corporation stock.However, the executor of the estate can use the stock price as of the date six months after the owner passes away as an alternative valuation date.If the stock price falls in the intervening time, this allows the stock to be valued at a lower price, thereby reducing estate taxes.If the original owner held the shares jointly with someone other than a spouse, the deceased owner’s share is stepped up or down.For instance, if the original owner contributed 60 percent of the investment money, 60 percent of the cost basis is stepped up or down.If the sale price is less than the cost basis, the heir realizes a long-term capital loss that may be used as a deduction on his income tax return.Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008.If you inherit stock, you are not responsible for taxable gains that occurred before the date of death.For example, if the stock was originally purchased for per share and the price was on the date of death, the figure is your cost basis and is subtracted from the proceeds when you eventually sell the shares.