gift giving - grantor tax relief

Investor never sold any stock instead she continuously withdrew cash over a period of years from increased valued portfolio using a margin account. Today investor is an elder. All remaining equity is pure profit. She wishes to give party $12,000 tax free gifts of remaining stock. If she gifts $18,000 of stock still on 33% margin the net value of the gift would be $12,000.

If investor gives away 100% of her portfolio there would be nothing left to sell thus there would be no reportable (taxable profit). Does this make sense and is it legal.

Example:

1995 investor buys $10,000 worth of stock. 1996 stock value $11,000 1997 investor borrows $2000 against stock - $9,000 remaining equity 1998 stock value $13,000 - $2000 margin - $11,000 remaining equity 1999 investor borrows $4000 - $7,000 remaining equity 2000 stock value $15,000 - $6000 margin - $9,000 remaining equity 2001 stock value $18,000 - $6000 margin - $12,000 remaining equity 2002 Investor gives $18,000 gift of stock with $6,000 margin - gift value $12,000

We know the recipient of $12,000 has no taxes due. What about the grantor who was relieved of the $6000 potential taxable profit..

Reply to
researcher
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The basis is still $10,000. You keep using the expression 'remaining equity'. Well, the total account value is $12K, I agree. But the owner has $10K basis, and $8K unrealized gain.

I believe the recipient has a $12K gift value which still has the $8K gain. She sells the stock for $18,000, pays back $6000 margin loan, and pays tax on the $8,000 gain, long term. TANSTAAFL - "There ain't no such thing as a free lunch"

Joe

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Reply to
joetaxpayer

Well, unless the investor keeps the stock until she dies and then passes it on to the recipient. In that case the basis would be the date of death value, and any tax on the gain would be wiped out.

On the other hand if the investor did that and her estate is large enough to incur estate tax, the value of the stock would be taxed in her estate at a higher rate than the income tax would have been.

Stu

Reply to
Stuart A. Bronstein

Are you thinking of the $12,000 exclusion from gift tax? That is an exclusion for the _giver_ of the gift, not the receiver, who is _never_ subject to the gift tax, no matter how large the gift.

The gift of stock is another matter. The givers original basis remains with the gift of a stock ($10,000 in this case).

In your example above, assuming that a broker would even allow such a transfer that included both stock that was pledged against a loan _and_ the loan itself to a 3rd party, without first selling off $6000 of stock to satisfy the loan first, in which case the capital gains on that sale would be taxable to the giver, but if such a transfer was allowed, then the receiver of the 'gift' would have $18,000 worth of stock with a basis of $10,000 and a $6000 loan to pay off.

[I quote 'gift' because I don't think that transferring the liability of a loan could be considered to be a gift.]

When the receiver of the 'gift' sells the stock he will have $6000 of capital gains tax to pay (he received $18000 of stock with a basis of $10,000).

Your example also has the unrealistic assumption that the margin loan can go on for years without being paid - where is the money to pay the interest on the loan coming from (margin loans are not interest free you know - there would probably be about $1000 of interest due in the example)?

So, it looks to me that overall, if you could 'give' (or transfer) both the stock and loan liability to a third party (which I doubt), that at the end of the day, the third party would have to pay capital gains tax on $6000 of the $18,000 worth of stock AND then use the proceeds to pay off the $7000 ($6000 + interest) loan - some 'gift'!

Reply to
Ernie Klein

Typo, right? Basis is $10K, value is $18K. $8K is LT cap gain. (BTW - I've moved stock along with margin debt in just this way. Each broker may have his own rules.)

Joe

Reply to
joetaxpayer

Yep.

That's interesting. How did you do it - just transfer the account to a different name?

I assume you didn't transfer it to a different account with a different broker.

Reply to
Ernie Klein

I think the receiver of the gift may have to pay gift tax if the giver is foreign. Will need to check.

Reply to
removeps-groups

Did some research. I can't find anything that the receive of a gift from a foreign national has to pay tax. They do have to report the gift on form 3520, and if they don't there will likely be penalties up to 25% of the gift. Some sites said the gift has to be reported if over 10k, and some sites said 100k.

Reply to
removeps-groups

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