Related Party Question

[DaveO]

Taxpayer’s daughter got married and Taxpayer co-signed the mortgage. Shortly after the birth of the second child the daughter and her husband divorced. The daughter took the kids and left the ex-husband in the house co-signed by her father the Taxpayer.

Ex-husband continues to live in the house and pays rent to the Taxpayer. After a few months the daughter gets in trouble and has to give custody of the kids back to the ex-husband living in the house the Taxpayer owns. The Taxpayer is unwilling to put the grand kids out on the street so continues to rent to the ex-husband. After a few years of fixing stuff on the house the Taxpayer just signs the house over and the ex-husband gets a new mortgage.

I don’t see a problem with the rental since he got FMV for rent. But what about the sale at below market? The ex-husband is not a relative, can he take the loss?

[JG EA]

Taxpayer’s daughter got married and Taxpayer co-signed the mortgage. Shortly after the birth of the second child the daughter and her husband divorced. The daughter took the kids and left the ex-husband in the house co-signed by her father the Taxpayer.

Ex-husband continues to live in the house and pays rent to the Taxpayer. After a few months the daughter gets in trouble and has to give custody of the kids back to the ex-husband living in the house the Taxpayer owns. The Taxpayer is unwilling to put the grand kids out on the street so continues to rent to the ex-husband. After a few years of fixing stuff on the house the Taxpayer just signs the house over and the ex-husband gets a new mortgage.

I don’t see a problem with the rental since he got FMV for rent. But what about the sale at below market? The ex-husband is not a relative, can he take the loss?

Off the top of my head - the Taxpayer has gifted the house. Gift tax return. Did your taxpayer get anything? Relieved of morgage at least. So, maybe only a partial gift.

[AJsTax]

Some things dont change,

relationships are not changed due to divorce for tax purposes, once an in-law, always an in-law.
The taxpayer received in value for the house the amount of the mortgage paid off. With depreciation taken on the house for rental is the sale really below his basis for a loss?

too many unknowns to get to the actual answer.

[DaveO]

All he got was mortgage relief. Even after depreciation he is losing about $20k. So if I'm understanding since the ex-husband is still a relative than the property is considered personal use property and the loss is non-deductible. The difference between debt relief and FMV would be the gift element. Thanks for both of your comments.