A recent article discussed the options of giving while living or passing your wealth on after you’re gone.
While each choice has its pros and cons, there’s one factor that may sway your decision in a certain direction: Capital gains taxes generated on the sale of appreciated assets.
The actual gains are calculated by subtracting the cost (or cost basis) of the asset from the price it sold for.
For example, if you bought 100 shares of stock for $30,000 and sell it five years later for $100,000, then you’ve generated $70,000 in long-term capital gains. If you give your stock to one of your children while you’re still alive, they’ll be hit with the same capital gains if they sell it at that price.
But if your child inherits these stock shares after you passed on, their capital gains burden might be much less—or not at all.
These scenarios apply not just to stocks but to physical assets such as property, fine art, and private business shares.
Let’s start by defining two terms: initial cost basis and adjusted cost basis.
Initial cost basis
Often, your initial tax basis equals your cost — what you paid for the asset. For example, the cost basis for the 100 shares of stocks used in the example above will always be $30,000.
It won’t change if you sell it or give it to someone else while you’re alive.
Adjusted cost basis
In some situations, the initial cost basis of an asset can increase or decrease over time. For example, if you buy a house for $400,000, your initial basis for it will be $400,000. If you later spend $50,000 to renovate and expand your kitchen, your adjusted basis in the house may increase to $450,000.
This is an important point, because if you sell your home or give it someone else while you’re still alive, the capital gain generated by its sale will equal the amount it was sold for minus the adjusted basis.
For example, if you sold your house for $800,000, your long-term capital gain would be $350,000 ($800,000 minus $450,000).
That’s why it’s important to keep documentation of any improvements you make to your home, since these expenses may be used to increase your cost basis (money spent on repairs, such as replacing a roof, generally are not considered improvements).
How cost basis can influence asset distribution decisions
Cost basis can be an important factor in deciding whether to give an asset to someone else during your lifetime or transfer it to them upon your death. The action you take may affect the amount of taxable gain subject to income tax when the person sells the property.
When you give an asset (such as a home) to someone while you’re still alive, that asset assumes the same basis in the asset that you had. This is often referred to as a "carryover" or "transferred" basis.
If the recipient sells that asset at a profit, the capital gain will be the same as if you sold it yourself. Since that gain could significantly increase their taxable income, giving an appreciated asset while you’re still alive isn’t always the best strategy.
Conversely, when you pass an appreciated asset on to someone else after your death, the initial or adjusted basis is “stepped up” to an amount equal to its fair market value on the date of your death.
For stocks, determining stepped-up basis is relatively easy. If you pass on the 100 shares of stock you paid $30,000 for and they’re now worth $100,000 on the date of your death, the “stepped up” cost basis will be $100,000.
So, if your beneficiary sells those shares for $105,000 shortly afterward, their capital gain of the sale will be $5,000, rather than $75,000.
With physical assets like property or fine art, it’s a little more complicated. These assets must be professionally appraised to determine their fair market value on the date of your death. Then the basis is adjusted accordingly.
So, if the home you paid $400,000 for is appraised for $900,000, its stepped-up cost basis for your heir will be $900,000.
If they sell it for $900,000 they’ll have no taxable gains.
Other factors may come into play
Capital gains shouldn’t necessarily be the only criteria for determining whether to give an asset while you’re alive or pass it on. Other factors may come into play, such as:
- Would giving the asset while you’re alive provide greater financial security to the recipient without jeopardizing your own?
- Is there a chance the asset could significantly decrease in value if you hold on to it until your death?
- Do you want to use giving while living as a strategy to remove as many assets from your estate as possible before you pass on?
- Are you worried about gift taxes? Your lifetime gift tax exemption is $13,990,000 in 2025, but if the value of a gift is over $19,000, you’ll have to file an IRS Form 709 for the year in which the gift is made.
If you need help figuring these issues out, consider speaking with a tax professional and/or a financial advisor.
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This article was authored by David Jaeger, Jeffrey Briskin and Broadridge Investor Communicaton Solutions. David is a financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. David can be reached at 508.598.1082 or djaeger@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
Copyright 2025 Canby Financial Advisors and Broadridge Investor Communication Solutions, Inc. Broadridge Investor Communication Solutions does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.