jobyts Posted January 14, 2017 Share Posted January 14, 2017 I was wondering if the following tax strategy has anything illegal based on US and California tax laws. Person X comes under high tax bracket. Person Y, who is an extremely trustworthy relative of person X, comes under very low tax bracket. Step 1. Person X lends $100K to person Y as a personal loan. (just a bank to bank transfer) Step 2. Person Y uses the $100K for investment and after, say 5 years, the amount grows to $150K. Person Y pays short term capital gain for the $50K he gained, but not much since his income bracket is low. Step 3. After 5 years, person Y returns $100K immediately back to the person X. No tax for both the parties, since it is just repaying the borrowed money. Step 4. Person Y gives back the ($50K - the tax he paid) to the person X as a gift over a period of multiple years, each year's gift within the tax-free gift limit. This way, person X avoids paying higher short term capital gain tax and avoids hitting AMT due to the long term capital gain. Does this strategy work? Are the tax assumptions I mentioned in each steps accurate? Link to comment Share on other sites More sharing options...
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