Key Takeaways
- A father in his early 70s holds about $32,000 of a bond ETF in his taxable account, sitting at a loss of around $5,200.
- If he still owns the fund when he dies, his heirs’ basis resets to its value that day, so no one ever deducts the loss.
- Giving the shares away while they’re down erases the loss as well, because the recipient figures a loss from the shares’ value on the day of the gift.
- If he sells by Dec. 31, he and his wife can take $3,000 off this year’s income on their joint return and carry the other $2,200 to next year, as long as they have no other gains.
Most retirees know the step-up in basis as one of the friendliest rules in the tax code: hold a stock until death, and the gain built up over decades never gets taxed. But the reset happens whether a holding is up or down. So if you, or a parent, are sitting on a loss in a taxable account, selling it may be the only way anyone ever gets to deduct it.
A dad’s $5,200 loss
A 38-year-old who manages their parents’ investments laid out exactly this problem in a post in Reddit’s r/Bogleheads forum this month. The father is in his early 70s, still working at around $110,000 a year, and collecting Social Security. The parents file jointly. He has approximately $32,000 in a bond ETF in his taxable brokerage account, sitting at an unrealized loss of around $5,200. The poster is weighing a sale before the year ends, worried that if the fund passes to his heirs, the loss “could disappear without ever being used.”
That worry is well-founded.
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Heirs start over at the value on the day of death
An heir’s cost basis is generally the property’s value on the day the owner died. On a stock with a big gain, that’s a gift: the heirs can sell right away and owe nothing on the gain built up before then. On this bond fund, it goes the other way. If he still owns it when he dies, his heirs’ basis is whatever the fund is worth that day, so the $5,200 loss never shows up on anyone’s return.
Giving the shares to his kids while they’re down doesn’t save the loss either. When a gift is worth less than the giver’s basis, the person receiving it uses its value on the day of the gift to figure a loss. That means the $5,200 is gone the day the shares change hands. (If the kids later sell somewhere between that value and Dad’s original cost, they have neither a gain nor a loss.)
Selling by Dec. 31 puts $3,000 on this year’s return
Selling while he’s alive is a different story. A capital loss offsets capital gains first, with no cap, so any gains the parents take this year use up as much of it as they need. Whatever’s left comes off their other income, up to $3,000 a year for a couple filing jointly, and the rest carries over to later years until it’s used up. With no other gains, that’s $3,000 off this year’s income and the other $2,200 off next year’s, for the full $5,200.
The poster estimates the federal tax saved at around $600 to $1,150, depending on how the loss gets used. Taking the loss this year also starts the carryover sooner. That matters because a loss still unused when a taxpayer dies can be deducted only on the final return, within that same $3,000 limit, and the estate can’t carry over the rest.
Swap funds, and mind the 30-day window
The poster’s plan is to sell and immediately buy a different bond ETF, so the family’s mix of stocks and bonds barely changes. Anyone who sells at a loss and buys substantially identical securities within 30 days before or after the sale can’t deduct the loss. Instead, the loss gets added to the cost of the new shares, which puts the deduction off until those shares are sold. A spouse’s purchase counts too. So the poster’s plan to check for dividends reinvesting into the same fund in the parents’ IRAs is a smart one.
Take the loss while it’s still his
The poster wrote that “if there’s a relatively straightforward opportunity to save close to $1,000 in taxes through one transaction, I’m open to it.” This is that opportunity, and I’d sell this year. A few hundred dollars won’t change anyone’s retirement. But one sale into a similar fund is about as little work as a tax break gets, and if he waits, he risks a deduction nobody can ever take. I wouldn’t touch the family’s winners, though: on a holding with a big gain, the reset at death is exactly what heirs want. Of course, if bond prices recover before he sells, the loss shrinks on its own, and so does the case for selling.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
