Tax on Mutual Fund Gift from Grandparents?

Question

Earlier this year I cashed in a mutual fund that was a custodial account that my grandparents set up for me so I could buy a house. In February the account was transferred over to my name (from my grandparents AND my name) and was worth about $40k which was all put into the down payment for a house. Considering this was a gift that was compiled over time, do I have to pay taxes on it?

Answer 1

No, you do not pay any taxes on it. Bona-fide gifts are never taxed to the recipient, only the giver.

Assuming that that didn't make any single deposits to it that exceeded the Gift Tax exclusion amount for the year in which the deposit was made, there is no Gift Tax consequences to them either.

OK, I inadvertantly left out some important information passed to me off-forum.

Since securities are involved with the transaction, there may be tax due when you cash out the account. You'll get a Form 1099-B that will report the proceeds from the sale. Normally, figuring your gain on sale of securities is pretty straightforward. You subtract your cost -- your "basis" in tax-speak -- from the sales price and figure your gain or loss. Since this was a gift, figuring your basis is where it gets tricky. Even though you didn't pay anything for the securities, your basis is NOT zero.

IRS Pub 551 explains how to figure your basis that you will use in calculating any gain or loss on sale and what your tax consequences would be from that. To get it right, you need to know the donor's basis (what they paid for the securities), the Fair Market Value when the gift was given to you, and how much Gift Tax was paid, if any.

The best way to get it right is to give Pub 551 a careful read, beginning with the section on Property Received as a Gift on page 8. That information along with the examples that are provided will help you in getting it right and keeping your tax bill where is should be. Some folks will say that you get the "pass-through" basis from the donor but that is NOT exactly correct and reading the Gift section in IRS Pub 551 will make that VERY clear, probably on the 3rd or 4th reading.

For example, if their basis was $30,000 and the FMV was $10,000 when you received the gift, your basis for any gain realized on a $40,000 sale is $30,000 (pass-through basis) for a gain of $10,000. BUT if you sold it at a loss -- say for $5,000 -- your basis would be the "FMV" basis of $10,000 so you'd realize a $5,000 loss. If you sold it for anything between $10,000 and $30,000, your basis would be the sales price you sold it at and there would be no taxable gain or deductible loss on the transaction; it would be "tax-neutral" to you.

That's how it works if the FMV when you receive the gift is less than their basis. If the FMV when you receive the gift is higher than their basis, your basis is the pass-through basis adjusted for the portion of any Gift Tax paid that is attributable to the increase in value. See the examples in Pub 551 to clear that up for you. If no Gift Tax was payable, your basis would be the pass-through basis, i.e. what they paid for the securities plus any adjustments to their basis.

Answer 2

I agree that the gift itself is not taxable. I was under the impression that property receieved by gift carried with it the giver's cost basis, so that if the gift had a cost basis of, for example $10000, for your grandparents, there would now be $30000 of gain to be accounted for. Some of that may be covered by taxes paid on reinvested distributions since it was given to you.

bostonian is usually (always?) right, but perhaps he didn't think about this point. (Or maybe I am wrong.)

Answer 3

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Answer 4

Was this custodial account a UTMA/UGMA? Was it transferred to you when you reached the age of majority in your state? Also, were you paying taxes on the dividends/capital gains (meaning, were the amounts earned on the investment reported under your tax id)?

I might be able to help you if I knew a bit more about your situation.

Answer 5

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