I was talking to someone about the step-up in basis on inherited assets. She said that wouldn’t apply to her municipal bonds. Is that the case? I believe she’s held (some of) these muni bonds long enough to where they’re worth more than par value.
If the answer isn’t straightforward, is there some place I can point her to that has the correct info? (I guess I’d like to know as well, for my own knowledge.)
Thanks.
I was talking to someone about the step-up in basis on inherited assets. She said that wouldn’t apply to her municipal bonds. Is that the case? I believe she’s held (some of) these muni bonds long enough to where they’re worth more than par value.
Muni bonds are stepped up (or down) just like any other asset. Par value is only important if you hold to maturity. Otherwise, it’s the difference between the current price of the bond and the date of death value that matters. Note, though, that the date of death value can be adjusted through amortization of acquisition premium or discount.
Ira
Muni bonds are stepped up (or down) just like any other asset.
Thanks. I wonder what caused her to get the incorrect understanding.
It’s possible that she got the impression based on how the brokerage reported the basis/gain/loss (that is, assuming she sold the bonds and is now trying to reconcile the differing numbers).
My own personal experience is that I inherited some stocks and bonds. Upon transfer, I went through a process with the brokerage to report the date-of-death value as the stepped up basis so that the adjusted basis was correctly reflected both for my on-line account summary and on my statements. I found that when I sold inherited stocks, the resultant cap gains/loss were correctly calculated based on the adjusted (i.e., date-of-death) basis. However, when I sold inherited bonds, the gains/loss statement reverted to the original basis for calculation (even though the account prior to the sale clearly reflected the adjusted basis).
When this first happened, I contacted the brokerage and asked them to make the correction. The short story is that the brokerage explained they couldn’t make the adjustment for the 1099 reporting. I don’t fully understand the explanation they gave, it sort of made sense at the time, but I have come to accept that the reported sale of inherited bonds will be somewhat off with my account. To deal with this problem, rather than rely on the calculated cap gain/loss from the brokerage 1099, I instead make note of the adjustment on my tax return and report the bond cap gain/loss based on my documented date-of-death value. This is how I’ve handled it for the last decade and it hasn’t created any problem.
Your friend may be experiencing a similar situation. Hope this helps.
MakingTrax