Q: I bought stock for about $5,000 and gave it to my son when it was worth $4,000. Now the stock has fallen further and is worth about $3,500. My broker says my son will only have a $500 loss (not $1,500) if he sells it. Is that true? E.B., Miami
A: Yes. Because of the transaction rules between related parties, your son's basis in the stock is limited to the fair market value (FMV) on the gift date if the FMV is less than your basis. That means the resulting tax loss would be limited to the difference between the $4,000 basis and the $3,500 sale price ($500). On the other hand, if the stock had increased in value before your gift, your son's basis would be your basis in the stock. In effect, that would increase your son's taxable gain if the stock continued to climb.
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