Hold, Sell, or Gift? A Guide to Wealth Strategy and Cost Basis

​When I started my investing journey at 23, I had no options for company-sponsored retirement. The real estate market was “hot,” and the most popular books were Rich Dad Poor Dad. If I was going to get started, real estate would be the place. I had no intent to have kids or get married, so I looked for a property that would make me happy. It’s been almost 20 years since that decision; now I have a highly appreciated asset. Should I take the tax burden on to sell, or should I just hold onto it and pass it on? If you are thinking of a gifting plan, let’s look at all your options!

When assessing your wealth strategy, you have silos of accounts that are taxed separately, and depending on whether you plan on using them in life or at death, there are significant differences in how to utilize them. Traditional retirement accounts are only taxed when you take the money out. Roth is never taxed if requirements are met. After-tax accounts/stock options, collectibles, and real estate are taxed on the cost basis. A quick note about cost basis: that is the “cost” at which you originally purchased the item/stock/property. These have the potential to be highly appreciated assets or golden handcuffs, like company stock options.

When you gift property or stocks, you move the cost basis along with that gift. This is different from if you received it at the time of death. The cost basis would be adjusted to the current market value. If you received a house as part of a wealth transfer, instead of having to pay taxes on the difference between the original value and the current value, it would get a “step-up cost basis.” That’s why many people say to avoid gifting during life and wait until you pass away.

Here’s the catch: you don’t get to see your family members enjoy the gifts. The best thing to do is understand that your needs and wants are different—not right or wrong—from another’s. When you create a plan either while living or after life, you are changing someone’s opportunities for the better. If they have a financial advisor, they are more likely to make stronger decisions with tax implications and future goals in mind.

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