Scenario: we were gifted with some valuable items by a family member. The intention is that we sell them and use the proceeds to benefit a different family member.
IRS taxes capital gains - say I bought a gram of unobtainium for a thousand dollars, and I sell it later for three thousand, I need to pay gains on that.
No problem on that. I’d prefer to stay on the right side of the law.
But - if someone GAVE me that unobtainium, my “basis” is the value as of when it was gifted to me. Say it was worth 2,900 dollars, my true gain is only 100 dollars, right?
My plan at the moment:
[ol]
[li]Get the unobtainium appraised (cost of appraisal offsets the gain, as I understand it)[/li][li]Sell the unobtainium for 3,000 dollars[/li][li]Ask the family member to write us a letter stating that they gave us the unobtainium and when[/li][li]If the appraisal was enough to trigger gift tax concerns (it won’t be enough to trigger the tax, but might be enough to exceed the annual limit) ask the family member to file a gift tax return with his own return[/li][li]Report the sale on the tax return for that year[/li][/ol]
What am I missing? I’m assuming that if the lag between gifting and appraisal is short enough, IRS won’t try to come back to me and say “it was worth a LOT less, pay up!”.
Stock sales are relatively straightforward, tax-wise. But collectibles: are they more likely to catch someone’s attention and trip an audit?
You need to make sure that the person gifting the item to you held it for a year. Just as the giver’s basis transfer’s to you, so does the holding period. Gains on items held shorter than 1 year are taxed at ordinary income rates, not the lower capital gains tax rate.
ETA: It is my understanding that the giver’s tax basis is what transfers to you, not the fair value at the time of the gift. So if the giver bought the item 25 years ago for $10, but it is now worth $10,000, then your capital gain will be $9,990.
I’m not a tax expert, and I am sure there are solid family reasons for doing it this way (because on the face of it, why not have the original owner sell and gift the proceeds themseleves, or give the item to the final beneficiary directly?), but if the IRS were to look at this transaction and decide that the reason for this convolution was to evade taxes or something money-launderingish, they might decide to treat the transaction differently than how your family intended it to be structured.
At least, that’s my understanding.
So, depending on the amounts involved and how concerned you are about IRS scrutiny, you might want to have a real tax expert look at the specifics and let you know that you are on solid ground.
As has been mentioned above, the cost basis of a gift you receive is the same as the givers basis. So if someone bought the item 10 years ago and gifts it to you, you get to keep the long term aspect of their holding period, but must also keep their basis and are not allowed a “step up” in basis to the FMV at the date of the gift.
This differs from items that are inherited. Inherited items DO receive a step up in basis to the FMV at the date of death of the deceased. This is why it is always better to receive your parent’s house or other assets as inheritance instead of gifts while they are alive, so you can reduce taxes owed if you end up selling.
Another important thing to keep in mind is that Collectibles, such as Art, Coins, Stamps or other such items are taxed at a higher rate than the normal capital gains rate. They are taxed at a maximum rate of 28% instead of the capital gains rate, which makes such items less investment worthy all other things being equal.
First of all, you need to make up your mind. Is this a gift or an inheritance. I saw you use both words in different posts. It makes a big difference.
If it’s an inheritance, your basis is stepped up at the donor’s death. For most people it’s the FMV on the date of death. However, the executor may choose to use an alternate date of valuation (up to 30 days after the date of death). In that case it is the FMV on the alternate date. The holding period is automatically long term.
If it is a gift from a living donor, you need three pieces of information to properly determine the basis: 1) the date of the gift 2) the donor’s basis 3) the FMV on the date of the gift.
If the FMV on the date of the gift is greater than or equal to the donor’s basis, then your basis is the donor’s basis. If the FMV is less than the donor’s basis, then there is a more complicated set of rules designed to prevent you from claiming any benefit from a capital loss while the item was in the donor’s hands.
And, by the way, there is a special maximum long term capital gains rate on what the law defines as “collectibles” which is not necessarily that same as what you might considet a “collectible.”
Actually the rule is that it is better the receive APPRECIATED assets as inheritance rather than gift.
The “step up” at death can also be a “step down” if the property has gone down in value. In the case of investment assets, the parents can sell the property, take a capital loss, and just give you the cash. You cannot benefit from the capital loss that occurred before their death.
In the case of their personal residence (or other personal use property), nobody will be able to claim a capital loss.
And you should never (from a tax perspective) give a gift that has gone down in value. Neither you nor the recipient will benefit from the capital loss.
Of course, if the gift is irreplaceable or has great sentimental value, you’ll just have to deal with the tax consequences.
Relative 1 inherited the unobtainium a decade or so ago. Then a couple months ago, gave it to us to use for the benefit of relative 2.
So let’s say the original owner bought the unobtainium for 10 dollars. When she died it was worth 1 thousand dollars. If relative 1 had sold it then for a thousand, there would have been no gain.
Now it’s 10 years later, and let’s say it’s worth 5,000 dollars. Relative 1 gives it to us, we hold it for a few months, and it’s now worth 5,200 dollars. And we sell it for the full 5,200 bucks.
If I follow, our basis is 1,000 (the value when the relative inherited it), so our gain would be 4,200 dollars.
If I have to split that into short term and long term, presumably we’d have a long term gain of 4,000 dollars (value when we were given the item minus the basis) and a short-term gain of 200 dollars. Sound reasonable?
wellanuff: yeah, there are indeed family dynamics at play, and the donor wishes the recipient to not be aware of the gift. As we’re already providing substantial support for the recipient, we get the “credit” (and the tax hassle!!) for being the intermediaries.
Hah - forgot to mention: I suspect the donor has no CLUE what the unobtainium was worth when it was acquired. One item had an appraisal around that time, the other probably did not so it’s anybody’s guess.
By the way: I know the discussion is focused on calculating the gain itself, but I did want to point out that collectibles and precious metals have a different maximum tax rate than other capital gain assets. Instead of a 15% cap, it’s 28%. For many people, that means it doesn’t even matter whether it’s short term or long term because their ordinary income tax rate is already lower.
Interesting. Yet another way this gift is a hassle.
The net (after tax) would still benefit the recipient, but since our tax rate is higher than the recipient’s (who probably pays nothing at this point), complying with the donor’s request costs everyone. Sigh. It’s tempting to skirt the law but I assume an auction house or whatever reports sales to the IRS.
