When you give stock to loved ones at below the price you bought it, can they sell it and claim a tax loss? What about other tax considerations for gifts of assets? Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer, provides some guidance.
Larry Light: Let’s say I am contemplating giving to my daughter stock or other property that has decreased in value below my purchase price. Is my daughter entitled to a tax loss if she sells the property?
Bruce Bell: The unrealized loss existing at the time of the gift cannot be deducted by your daughter if she sells the stock or other gifted property. A better tax result would be if you instead sell the property and take the loss personally and then gift the sale proceeds to your daughter.
Light: Let’s say you want to give it to her anyway. The stock may climb again. Regardless, it is her choice how to manage it.
Bell: Some tricky issues arise with respect to the tax basis of gifted stock that has depreciated in value. Whether a loss can be recognized depends on the value of the asset at the time of the gift. The starting point is determining its market value on that date.
In the case of stock, tax basis is generally the purchase price paid for the gifted stock. If the gifted property has a lesser value than the donor’s tax basis in the shares at the time of the gift, the recipient’s tax basis will be the property’s market value. If the property has appreciated in value, your daughter’s tax basis is the same as your tax basis. As a result, she may have a differing tax base depending on whether the property is sold for a gain or a loss.
Light: Can you give us an example?
Bell: Consider what happens if Allison purchases stock for $10,000, and then gifts the stock to her daughter Ella at a time when the stock has a market value of $7,000. Allison’s basis in the stock is $10,000, the amount she paid to acquire the shares. Ella’s basis in the stock is $7,000, the lesser of Allison’s basis of $10,000 and the market value of the stock at the time of the gift which is $7,000.
If Ella in turn sells the stock for $6,000, the difference between the $6,000 sale price and Ella’s tax basis of $7,000 will entitle Ella to a tax loss of $1,000. Allison’s unrealized $3,000 loss cannot be deducted by Ella.
Light: What if the value of the stock Allison gives to her daughter is higher than the amount she paid for it?
Bell: In the case of appreciated property, the gain will be based on Allison’s basis. If Allison’s stock is worth $11,000 at the time of the gift and Ella immediately sells it, Ella will report a gain of $1,000, the difference between the $11,000 sale price and her tax basis in the property, which is the same as Allison’s $10,000 tax basis.
Light: How does the step-up rule apply? Say, for a house.
Bell: Many people are well aware of the basis reset rule at death whereby the tax basis of the property of a decedent becomes the market value of the property as of the date of the decedent’s death. Given the tendency of property to appreciate in value over time, this basis step-up rule encourages taxpayers to retain appreciating assets until death to avoid income tax when property is sold after death.
But where property has depreciated in value, the resetting of the tax basis at death will not be beneficial. The reason is that the tax basis upon death will be decreased to the market value as of the date of death.
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