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It is my understanding that if you give appreciated stock to your adult children you do not owe capital gains tax at the time of the transfer of the stock, and the recipient starts with the new basis as of the date of the receipt of the gifted stock (provided you stay under the limit of gift tax). Is this correct?

If yes, what specific documentation needs to be kept by the donor (me) and the recipient about the transaction and for how long?

Your understanding is partly wrong. If you give appreciated stock to anyone (it doesn't have to be your adult children), you do not owe capital gains tax at the time of the transfer. However, the recipient does not start with a new basis, s/he assumes your adjusted cost basis and holding period.

On the other hand, if you give stock worth less than your cost basis, the recipient uses your adjusted cost basis to determine a gain on disposition, and the fair market value on the transfer date to determine a loss on disposition. In both cases, the recipient's holding period includes the time you owned the stock.

Gift tax limits are generally irrelevant to the transfer with regard to capital gains, but there is an exception. If the transfer is subject to gift tax (in excess of the annual gift limit) and>/b> gift tax is paid (total lifetime gifts exceed the lifetime exemption), then the cost basis is adjusted to account for the gift tax paid. (The calculation for determining the adjustment amount is detailed in IRS Pub. 551, Basis of Assets,

Both donor and recipient should retain the donor's adjusted cost basis, purchase date, and fair market value on the date of transfer. They should also retain the calculation of cost basis adjustment due to gift tax, if applicable.


The donor should keep
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