Selling Gifted Stock - Capital Gains, Gift Tax, AGI/Deductions

Question

My wife and I received a gift of $100k stock from a relative two months ago. Cost basis of the stock was $30k, purchased by that relative 5 years ago. We hope to sell the stock to use for a down payment on a house.

I was an accounting major years ago but have never done tax work and use software to file our (until now simple) taxes.

Questions:

1. Based on cursory research, it seems like the short-term vs. long-term capital gains rate determination on the sale of the stock is based on our relative's purchase date and not the transfer date to us, so we would pay the long-term rate. Does this sound correct? I can't find a definitive answer.

2. The $100k gift is over the $14k/person annual limit of tax-free gifts under the gift tax. However, that only means the amount over $28k ($14k x 2 for us as couple) goes toward the $5.4m estate tax limit and is not immediately taxable. As we will not receive more gifts from this individual, it's therefore not likely applicable. Is this correct?

3. The relative that gave us the stock thinks that it would be advantageous to wait until early 2018 to sell the stock and buy a house. Their reasoning is that we would therefore have more mortgage interest and real estate tax to deduct to offset the capital gains tax.

   Our combined income is $250k. To me, while waiting would result in a smaller payment in 2018, the ultimate outcome would be a wash.

   If we buy in late 2017, we will owe more in 2017 but have a larger refund in 2018. If we buy in early 2018, we would not owe anything in 2017 but end up owing in 2018. Based on back of envelope calcs, if we buy in 2017, we owe $20k in 2017 but get $10k back in 2018. If we buy in 2018, we owe nothing in 2017 but pay $10k in 2018 (the cap gains taxes minus the deductibles on points, mortgage interest, and real estate taxes). Regardless, we owe $10k in the next couple years.

   Am I missing something?

Answer 1

1. Basis, and purchase date follow the gift.

2. This matter is of no concern to you, the person(s) gifting need to file paperwork.

3. Not quite. The gain is long term, 15% (As a result of your income, and current 25%+ bracket). Your interest deduction would funnel through Schedule A and depending on the size house (adding up both property tax and mort interest) you'll probably have an itemized deduction.

In my opinion, if the right house at the right price comes along, you buy it, in either year. If the right house doesn't rear its head, you wait, regardless of year. Don't let the tax tail ever wag the investing dog, or house hunting dog.