Giving Appreciated Property – Watch Out for Taxes
Each year millions of people give some of their property, their money, stocks, cars and houses, to others. Sometimes the lucky recipients are charities (the real kind, not your grasping relatives) and in those cases the Donors get to deduct the gifts from their own income before computing their taxes owed. But often the gifts are to children, significant others, even complete strangers in need of help. In spite of everything we hear it really does seem that for the most part we are kind and generous creatures.
Unlike gifts to charities, though, there are taxes imposed on those generous but technically not charitable gifts, at least some of them anyway. In part that’s because in less lofty moments these gifts, often made to relatives, can be part of a strategy to transfer wealth from one generation to the next while minimizing any associated tax. Consider, for example, the case of Uncle who, approaching the end of his days gives to devoted Niece the 1000 shares of Apple stock he bought back in 1980 for $22 a share (current value about $450,000).
Uncle could, of course, have sold the stock and given Niece the cash. Uncle’s basis in the shares is the $22,000 he paid so in this case he would first see a long-term capital gain of $428,000 (i.e., 450,000 – 22,000) and pay a tax (at 20%) of $85,600. Niece ultimately receives as a gift the very cool amount of $342,400.
And because it’s a gift Niece takes the full amount without further tax obligation. Uncle is almost as lucky. He has given more than the $14,000 exempted (the 2013 amount) from the gift tax. So now, in addition to his gift, he is technically exposed to the gift tax (currently 40%…but it depends on Congress’s mood) on the $328,400 excess, or about $114,940. Uncle avoids this by writing down his lifetime “unified credit” but if he leaves a large enough estate behind it could catch up to him (actually, his grasping relatives) later.
Simpler is for Uncle simply to give the 1000 shares directly to Niece. Without an actual sale there are no immediate capital gains or gift taxes to pay, and no potential estate tax impact. Moreover, Niece can collect the dividends for as long as she owns the stock, paying tax only on that income.
When it does come time for Niece to sell the shares her basis will be the same as Uncle’s, i.e., the $22,000. This is called a “carry-over basis”. What that means is that if Niece actually sells her shares the IRS will collect its capital gains tax in full on the amount Niece receives less her carry-over basis.
But that could be years down the road. And taxes, like death and lots of other bad things, are nearly always better experienced as long from now as possible.
 There are also State taxes to be paid but for the sake of brevity I’ll ignore them here.
This article is for informational purposes only and does not constitute legal advice. You should consult a qualified attorney before taking any action.