Under alternate valuation, which statement is true about cost basis for capital gains purposes?

Under alternate valuation, which statement is true about cost basis for capital gains purposes?

• A. Both estate tax and cost basis use alternate valuation
• B. Estate tax uses alternate valuation but cost basis remains the date of death value
• C. Both estate tax and cost basis use the date of death value
• D. The cost basis uses the alternate value

Answer: (B)

Alternate valuation affects how the estate’s tax is calculated, not the basis used for beneficiaries’ capital gains. When the executor elects the alternate valuation date, assets are valued for estate tax purposes at six months after death (if that value reduces the tax). However, the cost basis of inherited property for the beneficiary remains the fair market value at the date of death. So, even though the estate tax may use the alternate value, the heir’s cost basis for later sale is still the date-of-death value. For example, if the date-of-death value is higher but the alternate date value is lower, the estate tax might be reduced, but the beneficiary’s basis stays at the date-of-death value, resulting in a capital gains calculation based on that higher base.

Alternate valuation affects how the estate’s tax is calculated, not the basis used for beneficiaries’ capital gains. When the executor elects the alternate valuation date, assets are valued for estate tax purposes at six months after death (if that value reduces the tax). However, the cost basis of inherited property for the beneficiary remains the fair market value at the date of death. So, even though the estate tax may use the alternate value, the heir’s cost basis for later sale is still the date-of-death value. For example, if the date-of-death value is higher but the alternate date value is lower, the estate tax might be reduced, but the beneficiary’s basis stays at the date-of-death value, resulting in a capital gains calculation based on that higher base.