Q.How do I get PortfolioCenter to treat the cost basis of an inherited security as “long term” If I sell the security before a year has passed, the realized gains report classifies it as short term. 

A.  First, make sure you have the right cost basis.  With an inheritance, you get what is called a stepped-up basis for tax purposes. However, note that special rules apply after 12/31/2009. Your cost basis is either the fair market value of the stock on the date of death of the donor or the market value six months later.   Check with the executor of the estate to be sure.

Once you know the date used, you can retrieve the stock price online through various sources (like Google Finance or Yahoo Finance).  After you determine the value, document how and where you found it, just in case the IRS decides to double-check your figures.

With the step-up in basis, inherited securities also receive a similar step-up to long-term status.  In other words, whenever you sell the inherited stock the gain will be taxed as a long-term capital gain.  This can be helpful when identifying stocks to make a charitable contribution because you usually want to gift your long-term stock.

But the PortfolioCenter software has no way of knowing this particular security is inherited and should be treated as a long term gain when sold.  What can you do?

You have two main options:

  • 1) in the Date Acquired field use the original date of purchase by the deceased or
  • 2) back-date the the date of death by one year.

My preferred method to handle inherited securities is to enter the Date Acquired as the date 1 year prior to the date of death and record the actual date of death in the notes field of the transaction.  The newer date indicates that the inherited securities have received a stepped-up cost basis (unlike using the original purchase date) and Schwab PortfolioCenter will treat any sell as long term.

Whichever method you choose, be consistent.

Need a quick answer?  Ask a question and I’ll try to answer with a blog post.

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