If true, that would be a great way to avoid some amount of Capital Gains tax. You buy stock for $1,000, it goes up to $10,000, and you sell/gift it for $100. The amount of the gift is $9,900, so if the recipient's basis is as you claim, they can sell it for $10,000 and there's no capital gains tax. Meanwhile, you don't have any capital gains tax to pay, taking a non-deductible $900 loss; nor is the gift large enough to trigger a gift tax. Therefore, it can't be the case.
The basis of the recipient is the _larger_ of the basis of the donor or the amount paid, not their sum. That way, the full increase is subject to Capital Gain Tax (perhaps partly by each of the parties, as it would be if the stock were sold/gifted for $5,000). Seth
I misspoke. The child's basis is the amount paid plus the parent's basis in the part gifted. Using your numbers, the child's basis would be $150,000 (for the half interest purchased) + $100,000 (the donor's basis in the half interest gifted) = $250,000. The parent would have a $50,000 gain to report on the sale and a $150,000 gift return item to report.
Carefully reading both responses above (Bill and Seth), I have to disagree with both of them. Using the same $300,000 home, the recipient pays $150,000 and gets a gift of the other $150,000 value. The donors cost basis in the "gifted" half is $100,000. Add that to the "purchased" half and you get an adjusted cost basis of $250,000. If this house were then sold for FMV ($300,000), there would be a capital gain of $50,000. The donor, of course, would be subject to Gift Tax reporting on the $150,000 gift.
If someone pays $100 for stock worth $10,000 he is paying for one percent and the other 99 percent is a gift. His basis is $999 (what the donor paid for the 99% that was a gift) plus $100. Stu
A buys stock for $5,000. It goes up to $10,000. A sells it to B as a gift for $5,000. A has no Capital Gains tax. B paid $5,000 and received a $5,000 gift. Your calculation says that B's basis is $7,500 (A's cost of the 50% that's a gift, plus B's payment). B sells the stock; total Capital Gains is only $2,500. That still avoids tax; Capital Gains should be on $5,000.
It doesn't. The parents have a NONDEDUCTIBLE $50,000 LOSS on the sale, and file a Gift Tax return on the $150.000 (-$24,000) gift. The child, if the house is sold immediately for FMV, would have a $50,000 GAIN on the sale. ($300,000 sale - $250,000 basis) = $50,000 gain.
Seth has been correct in this entire discussion. When in doubt, check the regulations -- in this case Reg 1.1015-4. In the case of a part gift, part sale, the regulation says that, for the purposes of determining gain, the transferee's basis is the larger of: (i) the amount paid by the transferee, or (ii) the transferor's basis. For the purposes of determining loss, the transferee's basis is the smaller of: (i) the basis used for determining gain, or (ii) the fair market value of the property at the time of the transfer. Reg 1.1001-1(e) addresses things from the transferor's perspective. The transferor in a part gift, part sale transaction must recognize gain to the extent that the amount paid to the transferor exceeds the tranferor's basis. The transferor is not allowed to recognize a loss in a part gift, part sale transaction.
They didn't sell a house for $150,000. They sold 1/2 a house for $150,000. Their basis in that 1/2 is $100,000. I wouldn't mind being wrong on this position.
But if the parents sold it for FMV, there would be a taxable gain of $100,000. The Capital Gains Tax on the other $50,000 seems to have disappeared. That doesn't seem likely. (Assume it's not a their residence, so the exclusion doesn't apply; or use a stock holding instead.) Seth
One court (Citizen's Natl. Bank of Waco v. United States 417 F.2d 675 (5th Cir. 1969)) says that under IRS §1015 the basis must be based on the basis in the hands of the donor. They interpret 1.1015-4 as meaning the same thing as §1015(b): "the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made." That is that the basis starts out as the basis of the donor. And if it is only part gift the basis is increased by the amount of gain recognized. In short, the either/or approach by the regulation is inconsistent with the specific language in §1015(a) which says, "shall be the same as it would be in the hands of the donor...." As a result it is not enforceable. Stu
First of all, the court in the case cited by him (Citizen's Natl. Bank of Waco v. United States 417 F.2d 675 (5th Cir.
1969)) makes the following statement: "The Commissioner apparently did not contest the actual basis used by the trustee in computing the gain realized by the trusts in the instant case. As a result, we do not have before us on this appeal the question of whether or not Treas. Reg. §1.1015-4 properly implements the principal function of the statute." The case is concerned with the tacking of holding periods for determination of whether gain is long term or short term. That makes any discussion of
1.1015-4 in the case dicta and not precedent setting. Even tossing out that fact, the quote that Stu made from the case misrepresents what the court actually said. Here's the full quote from that paragraph: "We note that §1015(a) dealing with gifts provides that the transferee's basis for determining gain "shall be the same as it would be in the hands of the donor." Subsection (b) dealing with sales to trusts provides that the transferee's basis "shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer." Thus both subsections (a) and (b) require the transferee to determine his basis at least in part by reference to the transferor's basis. Nevertheless, regulation §1.1015-4 provides that if the transfer is part a gift and part a sale, then the transferee must determine his basis by the price paid if that amount is greater than his transferor's basis. On its face, the regulation seems to be introducing a concept, price paid, not found in either subsection of the Code. However, upon closer examination it appears that "price paid" is not really at total variance with the Code. Indeed, the "price paid" method will always produce the same dollar amount as will "the grantor's basis increased in the amount of gain or decreased in the amount of loss recognized to the grantor," the method prescribed in subsection (b) of the Code. The two phrases express identical amounts in different words. Therefore, insofar as the primary function of §1015 is concerned, the change in terminology makes no change in result. The transferee's actual basis will be the same, regardless of which method is used to make the computation. However, the change in terminology is quite significant insofar as it affects the incidental function of §1015, which is the determination of whether or not the transferee is eligible to tack his transferor's holding period. As this case illustrates, by the mere change in words the regulation cuts off the transferee's right to tack whenever, as here, the price paid is greater than the transferor's basis." The court here is finding that the language in Reg 1.1015-4 means exactly the same thing as the language in the code. The court did not find any conflict in the language, and certainly did not declare the regulation to be invalid.
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