Collectors Can Keep Ahead of IRS with These Capital Gains Tax Tips

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Q. I own some paintings and other collectibles that have substantially increased in value since I purchased them. If I give them to my daughters, do I have to declare the profits?

A. Neither gains nor losses have to be reported when you dispose of pr operty by gifts. Result: You escape being taxed on your capital gains when you give away assets now worth more than their original cost.

Caution: This rule cuts two ways. You forfeit a deduction for the decline in value when you make a gift of property worth less than it cost you. Q. Does making gifts of appreciated property to my daughters mean that the capital-gains taxes are completely avoided on sales by them? A. No. There is a special rule for figuring a donee's gain. Her sales price must be measured against your cost, plus any gift tax attributable to the difference between the value of the property when given and your cost. Therefore, what you actually accomplish is not an avoidance of the capital gain, but a shifting of it from yourself to your daughter - a maneuver that still can be advantageous, provided her tax bracket is substantially below yours. Caution: This strategy is inadvisable if you have a daughter who has yet to attain the age of 14 by the close of the year in which she sells the property, says Joseph Anthony, a tax expert in Portland, Ore. Under the kiddie-tax rules, investment earnings from dividends, interest, capital gains and the like that are above a specified amount and are received by a child under the age of 14 are taxed to the child at the paren t's top rate - not, as before, at the child's typically lower rate. …