Sell $400,000 of Stock at 78 to Simplify Things for the Kids and the Capital Gains Bill Is Real. Leave It to Them Instead and the Entire Bill Disappears
Federal tax law treats a stock sale during your lifetime and a transfer at death as two completely different events, and the gap between them can run into tens of thousands of dollars your heirs never needed to pay.
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At 78, selling a $400,000 stock position to simplify your estate may seem like a generous move. Federal tax law, though, treats a sale during life and a transfer at death very differently. This article explains that rule, runs the numbers on both paths, and lays out how to decide which holdings to sell now and which to leave alone.
Why Basis Decides Who Pays
Basis is what you paid for an asset. When you sell, the taxable gain is the sale price minus that basis. Under Internal Revenue Code section 1014, inherited property generally takes a basis equal to its fair market value at the date of death. This step-up resets the heir’s starting point to today’s value, so decades of growth never get taxed.
Running the Numbers on a $400,000 Position
For 2026, a married couple filing jointly pays a 0% long-term capital gains rate on taxable income up to $98,900, and 15% up to $613,700. The 3.8% net investment income tax applies to investment income above $250,000 of modified adjusted gross income for joint filers.
Assume a married couple with a $100,000 original cost and $150,000 of other income. After the $32,200 standard deduction for 2026, their taxable income uses up the 0% band, so every dollar of gain lands at 15%. After the sale, taxable income reaches $417,800 and stays below the 20% tier.
| Item | Lifetime Sale |
|---|---|
| Long-term gain | $300,000 |
| Taxable income before sale | $117,800 |
| Tax at 15% | $45,000 |
| Income after sale | $417,000 |
| Net investment income tax | $7,600 |
| Total federal bill | $52,600 |
Holding the shares instead means the children inherit them with a basis equal to their value at death. If they sell soon after at that same price, the gain is zero and so is the federal capital gains bill.
Sorting Holdings Into Three Piles
- Large embedded gains: hold. Untaxed gain disappears at death.
- Little or no gain: sell freely. Almost nothing steps up, so simplifying costs little.
- Losses: sell during life. Inherited basis is date-of-death value, so a position worth less than its cost steps down and the loss disappears. Sold first, it offsets gains and up to $3,000 of ordinary income each year.
Retirement Accounts Flip the Usual Order
Traditional IRAs and 401(k)s get no step-up. Beneficiaries must include in their gross income any taxable distributions, taxed at ordinary income rates. Most retirees spend from the brokerage account and protect the IRA. Spending the IRA during life while holding appreciated taxable stock is often the better sequence for the family.
Exceptions Worth Checking
In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), the full value of community property becomes the new basis when one spouse dies, including the survivor’s half. Elsewhere, jointly owned spousal property steps up on only the deceased spouse’s half. Transfer-on-death accounts stay in the owner’s estate and generally qualify. Trusts vary: the IRS has held that assets in certain irrevocable trusts kept outside the estate get no step-up in basis. Whether a specific trust qualifies depends on how it was written.
The federal estate tax exemption for 2026 deaths is $15,000,000 per individual and $30,000,000 for married couples. Families below that threshold can set estate tax planning aside. For them, the step-up is what matters most.
Good Reasons to Sell Anyway
A single stock that dominates an estate is a real risk. Paying a 15% tax can cost less than a steep decline in that position. Needing cash, making gifts, or wanting peace of mind are all valid reasons to sell.
A Middle Path Through Charity
Giving appreciated shares directly to a charity avoids the gain entirely. Itemizers can deduct the full value, generally limited to 30% of AGI. Retirees age 70½ and older can send up to $111,000 a year (for 2026) straight from an IRA as a qualified charitable distribution, keeping that money out of taxable income.
Start With a Simple Sort
List every holding with its cost and current value, then sort each into one of three groups: big winners that may be worth keeping, losers that may be worth selling, and flat positions you can simplify freely. Drawing on the IRA for spending is another option to weigh. That gets you most of the order you want, and the kids don’t pay a tax bill they never needed to.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
