facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Retired Military Finances 401: Protecting Capital Losses

Taxes Estate Planning

I often say that your motivation to donate to charity shouldn't be the tax code. But, if you're going to donate to charity, you should get the most out of the Tax Code that is allowed. Along the same line, preserving the economic value of capital losses when death is relatively imminent may not be the most important thing to attend to, but it can provide a benefit to someone who needs it. Here is why.

Upon death, basis in capital assets (stocks, bonds, real estate, business) "step" to the Fair Market Value (FMV) upon date of death. This is normally called "step-up" as the FMV on date of death is typically higher than the original basis if the asset has been held for some time. This is generally a "good deal" as the profit on a subsequent sale is based upon the new basis (FMV on date of death). But it isn't always the case. In some circumstances the FMV on date of death will be lower than the original basis. In this case, the profit on the future sale will be higher than the profit based on the original basis. In fact, money that is a return on losses during the original owner's life become a taxable gain. There is another way though.

Gift Assets With Capital Losses

If it becomes apparent that death will occur before the asset will return to or exceed its original purchase price, it might be a good idea gift the asset to a person who would inherit it anyway. That is because basis on gifted assets is not (generally) affected by the FMV on the date of the gift. Another way to say that is that gifted assets maintain their original basis (or owner's basis). So in effect, the person who receives the gift, also receives the potential losses that can be deducted (within limits) against other income or offset gains when the gifted assets are sold (presumably at a loss).

The Rules Are Different Depending on Who Receives the Gift

If a spouse receives a gift of an asset that has an embedded loss, the basis of the asset he or she receives is the original basis. It should be noted that inherited basis for a spouse depends on whether the state is common law or community property when it comes to marital assets. Talk to an attorney in your state, to determine how it would apply to you.

This isn't the case if a non-spouse receives an asset with an embedded loss. It gets a lot more complicated and there are 3 scenarios.

  1. The asset is sold for more than the original basis. In this case, the gain is calculated using the original basis.
  2. The asset is sold for less than the FMV on date of gift. Similar to #1, the loss is calculated using the FMV on date of gift.
  3. The sale is for a price between the original basis and the FMV on date of gift. There is no gain or loss.

In scenarios 1 & 2, the capital gains and the resulting tax bill are less than if the same asset is inherited. In scenario 3, the loss is the same as if the asset is inherited.

Military Finances Are Different

While this topic is pretty standard for all taxpayers, that isn't always the case. There are a lot of things in the Tax Code that are different for military members and retirees. Military and Veteran benefits also affect your financial plan. We think you should work with an financial planner that works with these issues every day. If you'd like to chat with us, click on the button below or give us a call.


If you found this article useful, you might like the following blog posts:

Military Finances 301: Timing Inherited IRA Distributions After the SECURE Act


I Gifted More than $15,000. Now What?


Military Finances 101: Inheritance and Estate Taxes. Do You Know the Difference?






Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.