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Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 4:54 pm
by catalina355
From previous threads I understand that there are no legal or IRS tax issues if a family member provides a gift of appreciated fund shares to another family member, so long as the recipient tracks the cost basis and pays any capital gains taxes owed in the future.

My question: Are there legal or tax implications if the recipient of the gift makes a subsequent cash payment to the family member who gave the gift.

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 4:58 pm
by Gill
Sure are. It’s a taxable sale.

Gill

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 5:01 pm
by RickBoglehead
So Bob gives Mary a gift of $10,000 worth of IBM, with a cost basis of $5,000. Later, Mary gives Bob a gift of cash.

This could be seen as Bob trying to avoid paying capital gains tax, possibly because his tax bracket is higher, having Mary pay it at her lower rate, then giving him the net amount.

I would think the IRS would not take kindly to that. They could also see it as Bob loaning Mary money, and then Mary repays the loan. In that case, Bob needs to charge Mary interest, and there are guidelines as to the rate he must charge. He must also declare the interest income.

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 5:01 pm
by Wiggums
this article describes potential issues.

https://www.investmentnews.com/article/ ... ting-stock

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 5:48 pm
by catalina355
Gill wrote: Sun Oct 06, 2019 4:58 pm Sure are. It’s a taxable sale.

Gill
I'm trying to understand since this came up in a discussion. Is it the gift itself that creates the taxable sale?

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 5:48 pm
by catalina355
Wiggums wrote: Sun Oct 06, 2019 5:01 pm this article describes potential issues.

https://www.investmentnews.com/article/ ... ting-stock
Thanks. I was aware of some of these issues but good to see it all in one article.

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 6:30 pm
by Gill
catalina355 wrote: Sun Oct 06, 2019 5:48 pm
Gill wrote: Sun Oct 06, 2019 4:58 pm Sure are. It’s a taxable sale.

Gill
I'm trying to understand since this came up in a discussion. Is it the gift itself that creates the taxable sale?
No, the gift alone doesn’t create a sale. It’s the appearance of a quid pro quo with the cash transfer deemed consideration for the stock transfer.
Gill

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Sun Oct 06, 2019 10:26 pm
by Watty
I am not a tax guru but when people have mentioned things like this before one of the problems was that it might "step transaction".

https://www.merriam-webster.com/legal/s ... 20doctrine

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Mon Oct 07, 2019 3:24 am
by Klewles
RickBoglehead wrote: Sun Oct 06, 2019 5:01 pm So Bob gives Mary a gift of $10,000 worth of IBM, with a cost basis of $5,000. Later, Mary gives Bob a gift of cash.
Probably obvious, but I'll mention that there would be no tax implications if Bob and Mary are married. Mary's basis in the IBM stock would be $5,000, and the gift of cash to Bob would not be deemed a sale of the stock by Bob. (See Publication 550, "Transfers between spouses.")

Re: Gift of fund shares and subsequent cash payment between family members

Posted: Mon Oct 07, 2019 7:25 am
by catalina355
Gill wrote: Sun Oct 06, 2019 6:30 pm
catalina355 wrote: Sun Oct 06, 2019 5:48 pm
Gill wrote: Sun Oct 06, 2019 4:58 pm Sure are. It’s a taxable sale.

Gill
I'm trying to understand since this came up in a discussion. Is it the gift itself that creates the taxable sale?
No, the gift alone doesn’t create a sale. It’s the appearance of a quid pro quo with the cash transfer deemed consideration for the stock transfer.
Gill
Thank you for the explanation.