Question -
I bought stock in 2022 for $37,000 and sold it to my son at fair market value for $20,000 in 2024. What is the loss deduction you may claim on your 2024 tax return?
Answer -
In most cases, To determine the loss deduction you can claim on your 2024 tax return, you need to calculate the realized loss from selling the stock to your son at fair market value.
Realized Loss = Purchase Price - Selling Price Realized Loss = $37,000 - $20,000 Realized Loss = $17,000
In this scenario, you realized a loss of $17,000 from selling the stock.
However, in this case, your SON would be considered a "related party."
Related party rules are tax regulations designed to prevent taxpayers from taking advantage of certain tax benefits when transactions occur between parties with close relationships, such as family members or entities with common ownership.
In your scenario, selling the stock to your son qualifies as a related-party transaction. Here are the steps involved:
The related-party rules disallow the deduction of any loss on the sale because the sale was made to a related party, your son. This is to prevent taxpayers from artificially creating or realizing losses for tax purposes through transactions with related parties. Your son's basis in the stock is adjusted based on the related-party rules. If your son sells the stock at a loss, his basis will be adjusted accordingly.
In related-party transactions where the buyer receives the asset at a price below its original basis, the basis typically remains the same as it was in the hands of the seller.
So, in this case, if the son bought the stock from the father for $20,000 but the father's original basis was $37,000, the son's basis would indeed be the same as the father's original basis, which is $37,000.
Example 1: Your son sells the stock for $7,000. He has a loss of $30,000 ($37,000 - $7,000). However, in this scenario, your loss of $30,000 is disallowed due to the related-party rules. So, you cannot claim any loss deduction on your tax return.
Example 2 : Your son sells the stock for $11,000. He has a gain of $6,000 ($11,000 - $5,000). In this case, $30,000 of your loss can be utilized. Your son can use the $30,000 loss from you to offset his $6,000 gain. This will effectively reduce his gain to zero, and $6,000 of your loss will be lost.
Example 3 : Your son sells the stock for $30,000. He has a gain of $10,000 ($30,000 - $20,000). In this instance, your son's gain is $10,000. He can use the $30,000 loss from your sale to offset his gain. However, he can only use up to the amount of his gain, so he would use the full $10,000 of your loss to offset his gain. As a result, your son would have a net taxable gain of $0, and $27,000 of your loss will be lost.
Based on these adapted examples, it's clear that selling stock to your son at a loss results in implications according to the related-party rules.
Two takeaways -
Suggestion 1: Avoid selling stock to your daughter at a loss.
Suggestion 2: If you decide to sell stock to your son or daughter at a loss, ensure they are informed about the amount of your loss and the corresponding rules that apply to her.
