OCT. 16, 2000

Tax Tid-Bits
Transferring Loss Property to a Spouse

A terminally ill individual who owns assets that have depreciated should consider transferring those assets to his or her spouse if the spouse is expected to survive. For example, if Joe, who has terminal cancer, owns 1,000 shares of stock (for which he paid $90/share but is now worth only $40/share), he may want to transfer that stock to his wife Jane.

Here’s why: current estate and gift tax laws allow a step up in basis for assets transferred to a spouse at death. But for depreciated assets, that means a step down in basis, which will create higher capital gains taxes if the spouse later wishes to sell the property. In Joe’s case, his stocks were originally worth $90,000 and are now worth only $40,000, even though his basis is still $90,000. If he dies and Jane receives the stocks at his death, her basis will be the fair market value (currently $40,000). If the stock then regains some of its original worth (say, to $75/share), and Jane sells it, she will pay tax on her capital gain of $35,000 ($75,000-$40,000).

However, if Joe transfers to Jane his stock before his death, her basis will be his basis ($90,000). So, if the stock rebounds to $75,000 and Jane sells it, she will have taken a loss of $15,000.

It is important to note that this will only work with transfers of depreciated assets between spouses. If the owner of the property transfers it to any other individual, not only will transfer taxes apply, but the property will have a dual basis. For determining capital gain, the basis will be the original owner’s basis. For determining loss, the basis will be the fair market value at the time of the transfer.