Stock cost basis and gift tax exclusion ($12k a year) question

Discussion in 'Tax' started by raylopez99, Jan 19, 2007.

  1. raylopez99

    raylopez99 Guest

    By golly, I do believe I am the first person to ever ask
    this question on the internet. I kid you not.

    What basis does the donor use when gifting stock that has
    long-term capital gains? This is important because the
    donor is trying to stay under the $12000 a year (adjusted
    for inflation) gift tax return reporting requirement.

    Don't tell me about the donee (the gift receipient)--the
    internet is legion with answers to this question. I am
    asking about the donor.

    Concrete example:

    Granma wants to gift a stock, Castro Boat Systems (CBS) (of
    Miami, FL), she bought in 1959 for $1 a share.

    As good luck would have it, the dang thing is actually worth
    $10 a share today.

    Granma is in the highest tax bracket and wants to gift the
    stock to her deadbeat nephew Ray, who is in the lowest
    bracket, so he may sell this stock in 2008. She wants to
    stay under the $12000 a year ($24000 a year if spouse
    included; indexed for inflation) ceiling so that she may
    avoid having to file a gift tax return form (remember, she's
    paranoid about reporting stuff with the government).

    How many shares can Granma give Ray and stay under the
    $12000 limit? Is it 12000 shares ($12000/$1), or 1200 shares
    ($12000/$10)? Assume Granma has a unlimited number of
    shares to give, so it's feasible.

    IRS publication 551, as typical for most IRS publications,
    was full of introductory material and worthless (albeit only
    12 pages long instead of the usual 100 pages of fluff).

    RL
     
    Last edited by a moderator: Jan 23, 2018
    raylopez99, Jan 19, 2007
    #1
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  2. Basis is irrelevant to the donor for gift tax.
    Only the stock's FMV matters.
    Why do you think the stock basis comes into play for that?

    [snip]
    1200 shares, of course, because 1200 shares are worth
    $12,000.
    Well, given that 551 is about INCOME tax, not GIFT tax, I
    don't see why on earth it should talk about this. Maybe you
    should consider reading some publications about GIFT tax.
     
    Last edited by a moderator: Jan 23, 2018
    Rich Carreiro, Jan 20, 2007
    #2
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  3. raylopez99

    Herb Smith Guest

    The value of a gift is its FMV at the time of the gift. So,
    if the stock is currently worth $10/share, she would be
    limited to 1,200 shares before gift tax reporting is
    required. Original cost is immaterial for this limit, but
    transfers to the donee as his/her cost basis for future sale
    of the stock (in most cases). He also gets her holding
    period for short or long term capital gain consideration
    (e.g. he could sell the stock immediately and get LTCG
    treatment of the gain).

    Maybe you haven't seen much about this on the Internet
    because the value of a gift is a basic premise of gift
    giving (i. e. FMV at time of gift).
     
    Last edited by a moderator: Jan 23, 2018
    Herb Smith, Jan 20, 2007
    #3
  4. raylopez99

    joetaxpayer Guest

    For gifting purposes, the current value is the vaue of the
    gift. The donor, in your case has a $10 stock, so she can
    gift you 1200 shares with no further paperwork. (if you are
    married, she can gift your wife as well.)

    Of course, basis follows here, so the basis is $1200 (as you
    stated, she paid $1/share).

    JOE
     
    Last edited by a moderator: Jan 23, 2018
    joetaxpayer, Jan 20, 2007
    #4
  5. raylopez99

    Shyster1040 Guest

    The fair market value of the stock at the time the gift
    transfer is completed is the amount used to determine
    whether there has been a taxable gift or not.

    So, in your example, Granma could give 1,200 shares of stock
    to each recipient as an excludable gift. Keep in mind,
    however, that valuation is an art, not a science, so Granma
    should leave some wiggle room in case the stock was
    initially undervalued by mistake.
     
    Last edited by a moderator: Jan 23, 2018
    Shyster1040, Jan 20, 2007
    #5
  6. Basis? Do you mean what is the value for gift tax purposes?

    IRC ยง2512(a) says, "If the gift is made in property, the
    value thereof at the date of the gift shall be considered
    the amount of the gift."

    That is to say that for purposes of determining the amount
    of stock you can give away and still be under the annual
    exclusion amount, you have to look to the current market
    value, not the donor's basis.

    Stu
     
    Last edited by a moderator: Jan 23, 2018
    Stuart A. Bronstein, Jan 20, 2007
    #6
  7. raylopez99

    A.G. Kalman Guest

    This question has been asked so many times that there are
    thousands of hits on the internet. Your problem is you are
    looking at cost basis when you should be looking at value or
    worth, otherwise known as fair market value. Change your
    search criteria to: gift tax annual exclusion. The first
    hit from the IRS gives you your answer. In fact, when you
    get to the IRS page there is a link to frequently asked
    questions.
     
    Last edited by a moderator: Jan 23, 2018
    A.G. Kalman, Jan 20, 2007
    #7
  8. The amount of the gift is fair market value on the date of
    the gift; so, 1200 shares.

    If it were based on the donor's basis, Bill Gates could give
    his children a few billion $ in Microsoft stock without gift
    or inheritance taxes, because his basis is $0.

    Seth
     
    Last edited by a moderator: Jan 23, 2018
    Seth Breidbart, Jan 20, 2007
    #8
  9. raylopez99

    kastnna Guest

    How many shares can Granma give Ray and stay under the
    It is my understanding that grandma can gift 1200 shares
    ($1200 absis and $12,000 FMV) and the deadbeats basis is
    also $1200. It is not adjusted up for him and if he were to
    sell immediately he would realize a gain of $9 a share.

    If G-ma were to gift 12000 shares the gift amount would be
    $120,000 (12k x $10). $12k would be excluded as annual gift
    and $108k would be deducted from her lifetime exclusion
    limit of $1M. She'd still pay no taxes, but have to file
    with the IRS.
     
    Last edited by a moderator: Jan 23, 2018
    kastnna, Jan 20, 2007
    #9
  10. raylopez99

    Mark Bole Guest

    The instructions for Form 709 address this, the value of the
    gift is the FMV at the time of the gift, so your answer is
    1,200 shares. The form, if required to be filed, also asks
    for the donor's basis.

    On a side note, I also found in these same instructions a
    slightly more concrete approach for determing FMV of
    inherited/donated real estate in these instructions. It
    states: "Generally, the best indication of the value of real
    property is the price paid for the property in an
    arm's-length transaction on or before the valuation date. If
    there has been no such transaction, use the comparable sales
    method. In comparing similar properties, consider
    differences in the date of the sale, and the size,
    condition, and location of the properties, and make all
    appropriate adjustments." So I guess the donor or
    deceased's basis could be used, as long as it was determined
    by an arm's-length transaction, which would still be better
    than zero.

    -Mark Bole
     
    Last edited by a moderator: Jan 23, 2018
    Mark Bole, Jan 20, 2007
    #10
  11. Then you're looking at the wrong publication. For starters,
    look at publication 950.

    ChEAr$,
    Harlan Lunsford, EA n LA
     
    Last edited by a moderator: Jan 23, 2018
    Harlan Lunsford, Jan 20, 2007
    #11
  12. Gift is computed based on current FMV of the property given
    (i.e., $10/sh) but basis in the shares carries over to
    recipient. Therefore, granny can give 1,200 shares. Ray
    will have a basis of $1 per share in the stock so if he
    sells the stock for $12,000, he'll have a gain of $10,800
    which will be taxed as long-term capital gain (even if he
    holds it less than a year).
     
    Last edited by a moderator: Jan 23, 2018
    San Diego CPA, Jan 21, 2007
    #12
  13. Maybe you haven't seen much about this on the Internet
    Just to clarify: This is correct for gifts to people.

    Gifts to charities have other rules. Gifts from businesses
    have other rules.
     
    Last edited by a moderator: Jan 23, 2018
    Arthur Kamlet, Jan 21, 2007
    #13
  14. raylopez99

    raylopez99 Guest

    Thanks to all that replied. I figured that what I called
    the 'basis' for the donor was the Fair Market Value, under
    the principal that the IRS always tries to maximize tax
    receipts, but wanted a more definite opinion.

    This question was not asked, but I think one mistake was
    made by the poster who said that Deadbeat Ray would inhereit
    Granma's basis ($1 a share) rather than the FMV ($10 a
    share) at the time of the gift. I think this is wrong, as I
    recall the donee gets a 'stepped up basis' (perhaps upon
    Granma's death--so only if the gift passed when Granma
    passes), meaning if the stock was sold by Ray the same day
    as when it was gifted, the gain would be zero.

    This is neither here nor there, but given the above, it
    seems like gift giving is only a viable tax
    reduction/avoidance strategy (aside from giving $12/$24k
    every year over a large number of years, to reduce the
    taxable estate) when there is ambiguity in the FMV of the
    gift (I'm thinking of art, where the value seems to be in
    the eye of the beholder). So Ray (if it was an estate tax
    situation, Ray had inherieted, and Ray was looking to sell
    the gift) would claim the CBS stock is not that valuable
    (assuming it's a close corporation not traded on a public
    exchange, so the value of CBS stock is hard to determine),
    and would have an expert appraiser testify to this effect,
    while Granma, if she was deducting the gift from her income
    to pay income taxes (i.e., itemizing) would claim the CBS
    stock is worth a lot of money. The rich have done this with
    art I believe.

    Anyway, thanks for the advice.

    RL
     
    Last edited by a moderator: Jan 23, 2018
    raylopez99, Jan 21, 2007
    #14
  15. Even though the amount of the gift for gift tax purposes is
    the present market value, the donee gets the donor's basis
    unless the transfer is as a result of the death of the
    donor. In that case the basis is the current market value.
    Sorry, but gift giving in excess of the annual exclusion
    does not save a thing. Gift tax is incurred. If under the
    lifetime exemption amount it gets added back to the estate
    for estate tax purposes.
    The IRS has experts who routinely value closely held stock -
    it's really not difficult.
    You don't get to deduct a gift from income for income tax
    purposes unless the gift is to a qualified charity.

    Stu
     
    Last edited by a moderator: Jan 23, 2018
    Stuart A. Bronstein, Jan 22, 2007
    #15
  16. That's right: the stepped up basis occurs only on inherited
    stuff.
    Inherited, not gifted otherwise.
    Granma doesn't get to deduct anything for a gift to Ray,
    only for a gift to charity, in which case the value doesn't
    matter to Ray.

    Seth
     
    Last edited by a moderator: Jan 23, 2018
    Seth Breidbart, Jan 22, 2007
    #16
  17. raylopez99

    kastnna Guest

    "If the fair market value of the stock at the time of the
    gift is greater than or equal to the donor's basis, then
    your initial basis is the same as the donor's basis, with a
    possible increase for a portion of the gift tax that was
    paid."

    Donor's basis is $1200, Ray's basis is $1200.
     
    Last edited by a moderator: Jan 23, 2018
    kastnna, Jan 22, 2007
    #17
  18. Nope. The basis reset to FMV only happens for inherited
    (i.e. the owner has to die) assets.

    If an asset is gifted during life, the recipient
    takes on the giver's basis (with an added twist if
    the asset is held at a loss at the time of gift).
     
    Last edited by a moderator: Jan 23, 2018
    Rich Carreiro, Jan 22, 2007
    #18
  19. raylopez99

    michfr Guest

    When grandma gifts the stock, does she need to put something in Schedule D, because it's the disposition of an asset? What should she put as the sales price? If she puts in the FMV, then that makes it look like she owes capital gains tax. But she doesn't owe capital gains tax. It's the grandchild that will owe. So does she just set the "sales price" to her basis, so it comes out as no captal gain for her? Or does she put $0, because she did not re eive any compensation. Or does she indicate it as a gift in some way on Schecule D, or leave it off Schedule D altogether?
     
    michfr, Dec 24, 2014
    #19
  20. raylopez99

    Bob Sandler Guest

    She does not put anything on Schedule D. That is assuming
    that she actually transfers the stock in kind.

    Bob Sandler
     
    Bob Sandler, Dec 24, 2014
    #20
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