Gifts of Stock: Figuring the Tax

Q. What are the tax consequences of making a gift of securities when the stock is later sold for a profit? Will the recipient the seller--have to pay taxes using the original cost paid by the donor, or is the value of the shares at the time the gift was made used to establish the recipient’s cost basis? --E.B.W .

A. The answer depends on when the gift is made. The tax basis--the value used when computing tax obligations--of a gift made by a living person is the donor’s purchase price of that asset. However, the tax basis of an inherited asset--or a gift made at the death of a donor--is generally set as of the donor’s date of death.

Let’s say you give your son 100 shares of stock for which you paid $10 each, or a total of $1,000, two years earlier. No matter what those shares at worth at the time you make the gift, your son’s tax basis in those shares is $1,000, the same as yours. If he sells then for $20 each, he must pay taxes on the $1,000 gain. However, if you bequeathed those same shares to your son upon your death, when they were trading for $30 each, their tax basis would be set at $3,000. If he sold them then, he would have no taxable gain. It’s all a matter of whether the gift is made: in life or at death.

Now let’s say a bequeathed asset has declined in value between its purchase and its inheritance. In such a case, you have a gain if the asset is sold for more than the donor’s tax basis, and a loss if it is sold for less than its date-of-death value. In any case, a recipient is not allowed to claim as a deduction a loss in value that was not sustained during his ownership of the depreciated asset.

Divorce Avoids Penalty on 401(k) Withdrawal

Q. As part of my divorce settlement, I will soon receive about $14,000 from my husband’s 401(k) plan, which will equalize our respective contributions to these plans. Is my husband obligated to pay the premature withdrawal penalties for the funds I will receive? Are there any other liabilities associated with my spending these funds now rather than waiting until the prescribed disbursement age? --L.G .

A. Distributions from 401(k) plans made pursuant to a “qualified domestic relations order” are exempt from the penalties--10% federal and 2.5% California state--normally applied to premature (prior to age 59 1/2) withdrawals from tax-deferred savings plans.

However, if you elect to spend the money, and those funds were contributed on a pretax basis, you will be required to pay taxes on that amount, as you would on any withdrawal of tax-deferred savings. If you elect instead to continue saving the money on a tax deferred basis, you may roll your distribution from your ex-husband’s savings plan into an individual retirement account of your own without either penalty or immediate tax obligation.

Savings Bond Buyer Got the Dates Wrong

Q. I purchased EE Savings Bonds in October, 1986, at which time I was told they would mature in seven years. When I went to cash them in, I was told that the maturity was actually 10 years. Is changing the maturity date a common practice? --A.B .

A. According to the Federal Reserve Bank, you were either misinformed or misunderstood what you told about the maturity dates of the bonds you purchased. Series EE bonds purchased in October, 1986, were paying a guaranteed minimum rate of 7.5%--their highest rate ever--and were scheduled to mature (or double in value to their face amount) in 10 years. That is what your should have been told.

By the way, EE Savings Bonds purchased before May 1, 1995, pay the higher of either 4% or a market rate set semiannually based on prevailing conditions. Bonds purchased after this date pay only the market rate, with no minimum guarantee. However, the government does promise that no matter at what rate these bonds accumulate interest, they will be considered “mature,” or at their face value, in 17 years.

No Down Payment Is Key to Tax Question

Q. I held a second trust deed on a home on which I had to foreclose. I then paid off the first trust deed. Later, I sold the property, taking back the first trust deed. I received no down payment. May I treat this as an installment sale for the purposes of my taxes? --D.J.N .

A. Assuming that you are not engaged in the business of real estate sales, you may consider the transaction an installment sale because you received no down payment.

By the way, your cost basis in the property is your original basis in the second trust deed, plus your foreclosure expenses and the amount of the payoff on the first trust deed.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.