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Gift of Appreciated Property Shifts Capital Gain

Jul 10th 2017
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I’ve received emails from accountants on how to craft responses to questions from clients. I’ve edited and condensed the questions for clarity and brevity.

Q: I own some paintings and other collectibles that have substantially increased in value since I purchased them. If I give them to my lower-bracket mother-in-law, do I have to declare the profits?

A: Neither gains nor losses have to be reported when you dispose of property by gifts. Result: You escape being taxed on your capital gains when you give away assets now worth more than their original cost.

Note, though, that this rule cuts two ways. You forfeit a deduction for the decline in value when you make a gift of property worth less than it cost you.  

Q: Does making gifts of appreciated property to my mother-in-law mean that the capital gains taxes are completely avoided on sales by her?

A: No. There’s a special rule for figuring a donee’s gain. Her sales price must be measured against your cost, plus any gift tax attributable to the difference between the value of the property when gifted and your cost. Therefore, what you actually accomplish isn’t an avoidance of the capital gain, but a shifting of it from yourself to her – a maneuver that can still be advantageous, provided her tax bracket is below yours.

Q: Recently, I realized a sizable profit on the sale of some coins from my collection. Does the law allow me to defer payment of the capital gains taxes on the profit if I reinvest the proceeds in more coins or other collectibles, such as stamps or ceramics?

A: No postponement is permitted. The profit counts as reportable income on your return for the year the coins are sold, whether you reinvest the proceeds or not.

Q: Suppose I swap some collectibles for stock in a listed company, with no cash involved in the deal. Does that entitle me to postpone being taxed on my capital gain?

A: No. You are, however, entitled to defer the tax on a gain from the swap (in tax jargon, a like-kind exchange) of collectibles you hold for investment for similar property – say, an exchange of one stamp collection for another.

If you intend to go the like-kind route, it’s prudent to check beforehand to make sure that your deal meets the requirements imposed by Internal Revenue Code Section 1031.

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