What to know about taxes on jointly held stock
Q: My wife has passed away, and I would like to sell some stock that we held jointly. How will the gains be taxed when I sell the shares?
A: If you and your wife owned the stock as joint tenants with right of survivorship, then you became the sole owner after she died. Contact the brokerage firm to find out what documentation you need to provide.
When you sell the shares, how you will be taxed depends on where you live. In most states, half of the investment’s tax basis was stepped up when your wife died. That means when you sell, the capital gains or losses on your half of the investment will be based on the stock’s value when you originally purchased it, but the basis of your wife’s share will be based on its value at the time of her death.
Roger Young, a senior financial planner at T. Rowe Price, provides a helpful example. Say you and your wife bought shares of stock for $20,000. The stock was worth $70,000 when she died, and you sold the shares for $80,000 some time later. You each started out with a basis of $10,000 (half of the original $20,000 investment). Because the stock was worth $70,000 when your wife died, the basis of her half got bumped up to $35,000.
When you eventually sell all of the shares, the basis will be $45,000 (your original $10,000 and the stepped-up $35,000), and you’ll be taxed on a capital gain of $35,000 ($80,000 minus $45,000). Even if you sell the shares less than one year after she died, you’ll still pay longterm capital-gains taxes on the profit.
The calculations are different, however, if you live in a community-property state. (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community-property states.) In that case, the entire investment would be stepped up to its value at the date of the first spouse’s death. If the shares were worth $70,000 when she died and you sold them for $80,000, you’d be taxed only on the $10,000 increase. See IRS Publication 555, Community Property, for more information about the tax rules in community-property states.
It helps to keep records of the value of the investment when you originally purchased it, as well as its value when the joint owner died. If you don’t have those records, your financial institution should be able to help you track down the information.