Tax Tips
Tax Aspects of Receiving Stock or Other Noncash Gifts - February 2007
Richard Scrivanich - Partner
If you received a gift of stock or other appreciated property, the good news is you do not have to report the value of the gift in income. Of course, once you've received the gift, if it generates income you will report that income. For example, if shares of stock you've received later pay dividends, the dividends are taxed to you.
Complications can arise if and when you sell the property you were given. You will have to determine your gain or loss on the sale and for this you will need to know your "basis." For most property you buy yourself, the basis is simply your cost. For property received as a gift, however, special basis rules apply.
The general rule is that you receive the same basis in the property that the donor had in it. This is sometimes referred to as a "carryover" basis, because the donor's basis carries over to the donee-you-along with the gift. Many taxpayers are unaware of this rule and believe their basis to be the value of the gift when they receive it.
Example. Lyle buys stock for $1,000 and gives it to his niece Ellen when it's worth $8,000. Ellen later sells it for $11,000. Ellen's basis in the stock is only $1,000-the same basis Lyle had. Thus, she must report $10,000 of gain on the sale.
Note, if Ellen had sold the property for just $6,000, she would still have to report a gain (of $5,000 on her $1,000 basis), even though the property declined in value in her hands. She would only be able to report a loss if she were to sell it for less than $1,000.
Loss property. Special rules apply for property which has gone down in value in the hands of the donor. For such property, at the time of the gift, the donor's basis (cost) will be higher than the value of the property. In this case, you must keep track of two figures for basis purposes. To measure gain on a later sale, the general carryover basis rule applies and your basis is the same that the donor had. But to measure loss on a later sale, your basis is limited to the (lower) value of the property at the time of the gift.
Example (1). Karen buys stock for $12,000 and gives it to her nephew Ed when it's worth $8,000. Ed later sells it for $6,000. To measure loss, Ed's basis in the stock is only $8,000-the value of the stock on the date of the gift. Thus, Ed has only a $2,000 loss on the sale.
Example (2). The facts are the same as in Example (1), except that Ed sells the stock for $15,000. To measure gain, Ed's basis is $12,000, the same basis Karen had. Thus, Ed's gain is $3,000.
Under these rules, if a donee of loss property sells it for an amount in between the property's date of gift basis and (lower) value, there will be no gain or loss on the sale.
Example (3). The facts are the same as in Example (1), except that Ed sells the stock for $10,000. Here, to measure Ed's loss his basis would be $8,000, so there's no loss on the sale for $10,000. Similarly, to measure Ed's gain, his basis would be $12,000, so there's no gain on a sale for $10,000. Thus, Ed would report no gain or loss.
Did the donor pay gift tax? If the value of the gift is more than $10,000, the donor may have paid federal gift taxes on it. If this is the case and the property had appreciated in value in the donor's hands, you will be able to increase your basis. The rule is you add to your basis that portion of the gift tax paid which is allocable to the increase in value at the date of gift.
Example. Larry buys stock for $50,000 and gives it to Diane when its value is $150,000. He pays $30,000 in federal gift tax on the transfer. The increase in value ($100,000) is two-thirds of the value of the gift. Thus, Diane will increase her basis in the stock by $20,000 (two-thirds of the $30,000 in gift tax paid). Diane's total basis is thus $70,000: the $50,000 carryover basis plus the $20,000 under the gift tax rule.
Getting basis information. It's important to get the basis information you need from the donor. Many donors include this in the cover letter that accompanies the gift. If your donor didn't, you may find it awkward to say, "Thanks for the generous gift-what did you pay for it?" Accordingly, if you would like me to contact the donor on your behalf to explain the need from your tax standpoint, please let me know. In any event, don't delay in getting the basis information you need: the donor may destroy the records needed to establish basis once he's given away the property. If you can't establish basis, IRS can impose a zero basis in which case you will have to report the entire sale price as gain. Don't put yourself at risk in this fashion.
If you have any questions regarding gifting or any other tax matter, please feel free to give me a call at (562) 698-9891.
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