The basis for capital gain purposes of property received by an heir is adjusted to the fair market value of the property as of the date of death of the decedent. Thus, if David Smith gives at his death $10,000 worth of stock, that he purchased years ago for $3,000, to his daughter, Susan, it would get a new basis equal to the value on the date of his death, or $10,000. Then, if Susan sells the stock for $10,000, she would use that new basis in the computation of her capital gain and there would be no income tax on the sale.
This method of accounting, however, is not true if the stock was a gift made during David’s life, the recipient’s cost basis is the smaller of either the donor’s basis or the current fair market value. If Susan sold the gifted stock, she must use her father’s cost basis of $3,000 and would realize a capital gain of $7,000.