Sharing Investments with your partner

[Sandy & Shirley]

My domestic partner and I have been together for 22 years. We have reached a point in our retirement where our IRAs are mostly in Roth and we are starting standard brokerage account to Harvest LTCGs.

I had some discussions on other websites about how to transfer investments between our two new brokerage accounts, each with different Social Security numbers.

Let us say that I invested $5,000 in XYZ 13 months ago, and my investment is now worth $7,000, a $2,000 LTCG. If I transfer my XYZ shares to my domestic partner, as I understand it, it will be considered as a $5,000 gift, the original cost basis. I can only transfer / gift $18,000 a year in 2024.

The big question is; when can my partner sell the XYZ shares? The answer I got on this on other website was:

If you transfer shares solely for the benefit of lower taxes, you are breaking the step transaction doctrine, and it is tax fraud. How long does my partner have to hold the shares before they can be sold?

 

[RetiredHappy]

When you transfer your XYZ shares, valued as $7K today, then you have transferred $7K to her. The shares retain the original cost basis. When she sells, she has to pay the $2K of LTCG. There is no fraud here. The main thing is that you did not transfer $5K to her, you transferred $7K to her.

 

[Sandy & Shirley]

OK, the "gift" is 7K toward the 18K limit, not 5K, and that is fine.

The real question deals with what is called the "step transaction doctrine". Yes, we are looking for ways to transfer LTCG's between each other, is that always legal?

 

[RetiredHappy]

I don't see why it is not legal. I gift my son every year up to the gift limit. I sometimes transfer shares and other times I transfer cash which I would turn around and invest on his behalf. He is free to sell the positions anytime. We have different tax returns. He pays his taxes and I pay mine.

If she transfers the money back to you immediately, then it will certainly raise eyebrows.

 

[Jerry1]

Also, keep in mind that there is no gift limit. The limit is the threshold at which point the gift needs to be reported. Once reported, it goes against your life time exclusion which is currently $13 million. So unless you expect to have several million in your final estate, there's no need to worry about how much you're gifting. Yes, you'll have to file a form, but that will not generate a tax in and of itself.

Here's a quick summary:

From: https://money.usnews.com/money/pers...tax-rules-to-know-if-you-give-or-receive-cash

If a person's gift exceeds the annual exclusion limit, they must file Form 709 with the IRS. But that doesn't mean they'll have to pay taxes.
“It doesn’t necessarily generate a tax right away,” says Daniel Laginess, CPA and president of Creative Financial Solutions in Southfield, Michigan.
That’s because in addition to the $18,000 annual exclusion, there is a $13.16 million lifetime exclusion, per person, for gift and estate taxes as of 2024.
“The excess amount goes against the lifetime exemption,” Laginess says. That means if you make a gift larger than $18,000 to at least one person, the excess will be subtracted from your lifetime exclusion.

I do not think the transaction you described needs to be evaluated against the step transaction doctrine. Here is a good summary of the doctrine. In this case, we'd have to know what your partner intends to do with the gift after the first transaction. Though, I think you've gone down that path because you thought you were gifting the basis of the stock and somehow eliminating the capital gain in the process. You are not. The capital gain will have to be paid at some point when the stock is ultimately sold. Therefore, the step transaction doctrine wouldn't apply unless you create some scenario where you get out of paying capital gains tax - which you haven't.

Here's a good article.

A walk through the step-transaction doctrine

This article discusses the step-transaction doctrine, the three tests used to determine if it applies, and advice for taxpayers to help avoid an IRS challenge of the tax treatment of a series of transactions based on the doctrine.

www.thetaxadviser.com

 

[mrfeh]

My domestic partner and I have been together for 22 years. We have reached a point in our retirement where our IRAs are mostly in Roth and we are starting standard brokerage account to Harvest LTCGs.

I had some discussions on other websites about how to transfer investments between our two new brokerage accounts, each with different Social Security numbers.

Let us say that I invested $5,000 in XYZ 13 months ago, and my investment is now worth $7,000, a $2,000 LTCG. If I transfer my XYZ shares to my domestic partner, as I understand it, it will be considered as a $5,000 gift, the original cost basis. I can only transfer / gift $18,000 a year in 2024.

The big question is; when can my partner sell the XYZ shares? The answer I got on this on other website was:

If you transfer shares solely for the benefit of lower taxes, you are breaking the step transaction doctrine, and it is tax fraud. How long does my partner have to hold the shares before they can be sold?

It's not clear to me what you are trying to achieve/avoid...

Roth proceeds are tax free. Why not wait until the money is needed, sell shares, and then transfer the cash to a joint account?

 

[pjigar]

The real question deals with what is called the "step transaction doctrine". Yes, we are looking for ways to transfer LTCG's between each other, is that always legal?

To be safe, I would wait at least for 1 month as specified by wash sale rule. Next up would be 1 year period as required to be considered LTCG but that would be an overkill.

From What is the wash sale rule? - J.P. Morgan:
A wash sale happens when you sell a security at a loss and buy a “substantially identical” security within 30 days before or after the sale. The wash-sale rule prevents taxpayers from deducting paper losses without significantly changing their market position.

PS: By the way, for Roth money LTCG does not apply so I am hoping your tax question was for the brokerage balance.

 

[Jerry1]

Neither would apply. The gift will transfer the holding period as well as the basis. So no holding period issue. There would be no wash sale unless the partner re-bought the same security. That could happen but is not described in the original post as something being considered.

 

[Dalton]

Could the partner be in the 0% LTCG bracket, sell the shares, and immediately gift the $7000 cash back to OP?

 

[Jerry1]

Could the partner be in the 0% LTCG bracket, sell the shares, and immediately gift the $7000 cash back to OP?

Mechanically, that would work and it’s unlikely the irs would find out, but that is exactly the sort of thing where the step transaction doctrine would apply. Otherwise known as substance over form. The form is okay, but the substance is tax avoidance.

 

[mrfeh]

Mechanically, that would work and it’s unlikely the irs would find out, but that is exactly the sort of thing where the step transaction doctrine would apply. Otherwise known as substance over form. The form is okay, but the substance is tax avoidance.

I would go further and refer to that as tax evasion.

 

[Koolau]

Does any of this apply to married partners? Are there any advantages of transferring funds (gifting) to married partners?

 

[RetiredHappy]

Does any of this apply to married partners? Are there any advantages of transferring funds (gifting) to married partners?

Only if you are filing separately. You can gift whatever amount that you want to a spouse.