Answer By law4u team
When a person receives a gift of appreciated assets such as stocks, real estate, or valuable collectibles, the gift can have significant tax implications. In particular, capital gains tax may apply when the recipient sells or disposes of the gifted asset. The tax implications depend on the original cost basis of the asset (i.e., how much the donor paid for it) and how long the asset was held before the transfer.
Impact of Gifting on Capital Gains Tax
Cost Basis of the Gift:
When a person receives a gift of appreciated property (such as stocks or real estate), they generally inherit the donor's cost basis. This means that the recipient's basis for calculating capital gains tax is the same as the donor's. For example, if a parent gives their child stock that was purchased for $5,000 but is now worth $10,000, the child’s cost basis for the stock will be $5,000. If the child later sells the stock for $12,000, the capital gains tax will be calculated based on the $5,000 cost basis, resulting in a $7,000 capital gain.
Holding Period for Capital Gains Tax:
In addition to inheriting the cost basis, the recipient may also inherit the donor’s holding period. This means that the holding period for determining long-term or short-term capital gains may be based on how long the donor held the asset. In many cases, long-term capital gains tax rates (for assets held over one year) are more favorable than short-term capital gains rates (for assets held for one year or less). Therefore, if the donor held the asset for more than a year, the recipient could potentially qualify for long-term capital gains tax treatment even if they sell the asset shortly after receiving it.
Gift Exclusion and Taxes:
While the recipient typically does not owe taxes upon receiving the gift itself, they may be subject to capital gains tax when they sell the asset. The donor may be required to file a gift tax return if the value of the gift exceeds the annual gift exclusion limit. However, the donor—not the recipient—typically pays any gift taxes. The recipient's responsibility arises only when they sell the gifted asset.
Impact on Real Estate:
When real estate is gifted, the recipient generally takes on the donor’s cost basis. This means that if the donor purchased a property for $100,000, and it has appreciated to $200,000 at the time of the gift, the recipient’s cost basis will remain $100,000. If the recipient sells the property later for $250,000, they will owe capital gains tax on the $150,000 gain (the difference between the sale price and the original cost basis). However, special rules may apply in certain circumstances (like the primary residence exclusion), and the rules vary by jurisdiction.
Special Considerations for Depreciated Assets:
If an asset has depreciated in value, the recipient may face different tax implications. In some cases, selling a depreciated asset can result in a loss for tax purposes, which could offset other capital gains. However, if the asset is sold for less than its original purchase price (cost basis), the recipient generally won't owe capital gains tax, but might still face other tax considerations, depending on the circumstances.
Example:
Suppose James receives a gift of 100 shares of stock from his father. His father originally purchased the stock for $2,000, and at the time of the gift, the stock is worth $10,000.
James inherits his father’s $2,000 cost basis.
A few months later, James sells the stock for $12,000. Since his cost basis is $2,000, his capital gain is $10,000.
James will owe capital gains tax on the $10,000 gain, and the type of tax (short-term or long-term) will depend on how long his father held the stock before gifting it to James.
If James's father held the stock for more than a year, James would qualify for long-term capital gains treatment, which could result in a lower tax rate.
