Tax question - utilizing capital losses through gifting stock.?

Question

I just found that that when you gift stock, the person receiving the stock inherits your cost basis. My parents have a substantial capital loss carryover from the .com boom and I wanted to obtain the advice of someone who understands tax laws fairly well to see if the following scenario would work.

1. I gift my dad $12,000 (or whatever the limit is for the gift tax exclusion) worth of stock. My cost basis on the stock is $6,000 so he will have a capital gain of $6,000.

2. My dad sells the stocks, but because of his capital loss carryover he does not have to pay any capital gains tax.

3. My dad gifts my wife $12,000 in cash.

Is there any issue with this? Or, a better question is do you think the IRS would have an issue with this?

Answer 1

As a single scenario it does not work. It is a scheme for tax avoidance. Gifts have to be with no strings attached. It follows, therefore, that you cannot do this more than once (if you are lucky) without attracting the attention of the IRS.

There are ways to do this legally, but you really need to sit down with a qualified, REPUTABLE (repeat, REPUTABLE) tax professional and talk it through thoroughly. Do not accept any answers you get here (even mine) without checking the info yourself. If you do consult a tax professional, remember that you sign the return to say that it is correct. If the "professional" draws you into a scheme that is illegal, you will suffer penalties as well as your adviser.

Answer 2

If you are given stock from someone and eventually sell it, your basis is either the giver's basis or the FMV on the date of the gift.

A) The FMV on the date of the gift is higher than the giver's basis.

i) When you sell the stock, your basis is the giver's basis.

B) The FMV on the date of the gift is lower than the giver's adjusted basis.

i) if you sell the stock for more than the giver's basis, your basis is the giver's basis.

ii) if you sell the stock for less then the FMV on the date of the gift, your basis is the FMV on the date of the gift. The loss from the giver's basis down to the FMV is lost. Ouch.

iii) if you sell the stock for between the FMV and giver's basis, you have neither a gain or loss on the sale.

So, according to your scenario, #1 is definitely true. I see nothing wrong with your #1. #2 is also dead on. No problem here. I like your choise to help your father with the unused capital loss carryover. This is a great way to use it up. Finally, there is nothing wrong with #3. In fact, I don't see why he couldn't give it back to you instead of your wife. As long as you don't have a written or verbal agreement ahead of time that says he must sell the stock and give you the money back, there is nothing in the IRS law that I've even come across that says that there is any violation whatsoever. In fact, I really like the idea. You can use this with two unrelated people. If one has huge losses they'll never use up and the other has gains that they don't want to pay tax on, they can get together. You have to really trust the other person and you can't have any written or verbal "you must give me the money back" agreements. In fact, why don't you give during one year and receive during the other. I'd love to see the IRS "prove" that you did it to avoid tax.

Answer 3

alongside with a 1040, you will additionally p.c. a time table D. in case you do no longer many times use tax application, you will desire to have the skill to easily seem on the time table D and its classes and fill it in, exceedingly in case you only had some revenues. in case you had one hundred diverse revenues it is going to possibly no longer likely be extra durable, yet may well be longer and a soreness. the ideal section is for short term, shares you owned a year or much less formerly you offered them. the backside 0.5 of the front internet site is for long term, something you owned for a minimum of a year and an afternoon. Fill in those lines, then do only the math the form tells you to do. you will desire to be ok. a magnificent determination from the tip of the time table D will flow to the 1040 - it is going to inform you the place. the only complicated section, and this isn't any longer all that undesirable, is which you will have some thing observed as a carryover. you may only take $3000 of the internet capital loss each and consistent with annum against different, non-time table D earnings. something is "carried over" to next year - no longer something very complicated approximately it, you only would desire to convey it to strategies next year once you bypass to do your 2012 return.

Answer 4

Since one "gift" is related to the other, the "gift" to your dad isn't a gift, but since it's for consideration, it's a sale.

So no, if the IRS is aware of all the pieces to this transaction, they would definitely have an issue with it.

Answer 5

I agree with skip. Each step in you plan appears legal, but you would have a hard time convincing the IRS the 'gifts' were actually gifts.