Advisers probably don't know about this tax-saving strategy

Gifting depreciated assets to a spouse can yield a substantial benefit when doing tax-loss harvesting

Jan 29, 2018 @ 1:19 pm

By Greg Iacurci

There's a specific provision in the tax code that could help individuals save a greater amount of money through tax-loss harvesting, but the provision is one that's often overlooked by financial advisers.

Tax-loss harvesting allows individuals to reduce their capital gains tax by offsetting the appreciation of securities in a taxable portfolio on a dollar-for-dollar basis with losses elsewhere in the portfolio.

The particular strategy discussed here could help clients preserve a larger capital loss — and therefore offset more capital gains — than they otherwise would.

It involves a taxpayer gifting assets that have depreciated in value to a spouse before the taxpayer's death. If the taxpayer were to gift the assets to anyone else — a child or grandchild, for example — that person would receive the gifted asset at its current fair market value.

However, the spouse is unique in that he or she would inherit the asset at its original cost to the purchaser.

(More: Tax reform: 7 essential strategies for financial advisers)

For example, let's say Fred is an elderly man who'd purchased ABC stock for $200 a share in a taxable portfolio. Over time, the stock has depreciated in value to $100. Realizing he may soon die, Fred gifts the asset to his spouse, Celine.

Celine sells the stock after its value erodes further, to $50 a share. Her realized loss would be $150 (the original cost of $200 minus the current value of $50).

Celine could use that $150 to offset $150 in gains elsewhere in her portfolio. She could also use any losses exceeding her gains to exclude up to $3,000 of ordinary income from tax. Any additional losses can be carried over indefinitely into future tax years.

Now let's say Fred had gifted the asset to his daughter, Emily, instead. She would receive it with a "step-down" in tax basis, at a cost of $100 (its value at the time Fred gifts the stock), not $200. Emily eventually sells the stock for $50 a share. Her loss would only be $50, meaning she can offset fewer capital gains.

Another example: Fred doesn't gift the stock to his wife Celine, but instead dies with the stock in his name and names Celine as the beneficiary. She wouldn't benefit in the same way — the stock would pass to her at a value of $100, rather than the original $200.

The planning strategy here for financial advisers: Before a client dies, move depreciated assets out of their name to preserve the loss for the surviving spouse, said Jeffrey Levine, CEO and director of financial planning at Blueprint Wealth Alliance.

(More: Oops! Unintended consequences of tax-law changes)

The reason many people may not be familiar with the strategy is because so-called "double basis" rules would ordinarily negate this particular tax benefit, Mr. Levine said. However, a specific provision in the tax code — Section 1015(e) — says otherwise for gifting assets to a spouse.

The strategy isn't new — it existed even before Republicans' recent overhaul of the tax code, which President Donald J. Trump signed into law in December.

"I don't think it's something a lot of people realize," Mr. Levine said. "As an adviser, what an awesome thing to do, to talk about strategies no one else is really mentioning. It really gives you credibility in the eyes of the client."

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