Related Party Loss

[Snaggletooth]

Mortimer has rental property purchased several years ago for $35,000. Since then Mortimer has deducted $20,000 in depreciation.

He is planning to sell this property to his son for $28,000. For purposes of disallowing the loss to a related party, is his basis $35,000 or $15,000?

[Burke]

Not quite sure I understand the question. If Mortimer bought property at $35K and has depreciated $20K, then Mortimer's adjusted basis is $15K. If he sells to son at $28K, he has a taxable gain, not a loss. And it may be ordinary gain if it is depreciable property in the hands of the son. Son's basis is $28K, the purchase price.

[Snaggletooth]

There Is A Gain

Thanks Burke. No question that a reportable GAIN occurs, if for no other reason than recaptured depreciation (not necessarily ordinary income, capped at 25%).

The question is for purposes of disallowing the loss to a related party. Is the gain limited to $13,000 or does he have to add back the purchase difference of $7000?

[WhiteOleander]

Thanks Burke. No question that a reportable GAIN occurs, if for no other reason than recaptured depreciation (not necessarily ordinary income, capped at 25%).

The question is for purposes of disallowing the loss to a related party. Since he must report recaptured depreciation, is he still allowed to take the $7K loss on his Schedule D?

I'm not seeing a loss. The basis is 15000.00. He sells it for 28000.00. That is a gain. The original purchase price of 35000.00 is not used to compute the gain or loss.

[S T]

Mortimer has rental property purchased several years ago for $35,000. Since then Mortimer has deducted $20,000 in depreciation.

He is planning to sell this property to his son for $28,000. For purposes of disallowing the loss to a related party, is his basis $35,000 or $15,000?

What is the amount assigned to Bldg (depreciation basis) and the Amt assigned to Land Value for the original purchase price?

Could it be your records do not reflect the Land Basis, only the Depreciable Basis?

Just a thought

But given the OP client does have a gain.

Sandy

[mactoolsix]

Gain on Sale or Trade of Depreciable Property

Gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it.

From the 13,000 gain on the original sale (28,000 less 15,000) all of it would be ordinary income. Since the entire gain is taxed as ordinary income, there is no depreciation recapture (which would have been capped at 25%).


possibly you are referring to this rule "For purposes of disallowing the loss to a related party"?
Property received from a related party (subsequent sale)

If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent that it is more than the loss previously disallowed to the related party. This rule applies only if you are the original transferee and you acquired the property by purchase or exchange.

If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party.

Since there is no loss on the original sale from Dad to Son, this rule would have no bearing on the subsequent sale.

From Pub http://www.irs.gov/publications/p550...blink100010462
Mike

CORRECTION: As pointed out (in the following posts) - For "Gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it." related parties only includes 1.) a person and their controlled entities, 2.) a taxpayer and trust when T/P is beneficiary, 3.) an executor and beneficiary, or 4.) an employer and a Welfare benefit fund (as listed Pub 544 Ch2 http://www.irs.gov/pub/irs-pdf/p544.pdf)
Note this list does not include the normal "related parties" i.e. relatives.

Thank you to Roland and Burke for the clarifications,
Mike

[Burke]

Perhaps it is the perception (valid) that Dad has incurred a monetary loss here: he bought prop at $35K and he is selling it for $28K. But he does not have a tax loss to report (or disallow) because he has recovered $20K of that cost (cumulative) on his tax returns since he purchased it. He has a taxable gain. So it does not come under any of these rules for a loss to a related party. But it may not be capital gain due to the rules for sale at a gain to a related party as I understand them.

[Roland Slugg]

Snag, you're seeing ghosts where there are no ghosts. The gain is a LTCG, pure and simple. It is also true that the entire $13k gain consists of "Unrecaptured §1250 Gain" and as such is potentially taxable as ordinary income, but at a rate no greater than 25%.

Two of the above posts (mactoolsix and Burke) claim that the dad's gain is taxed as ordinary income due to some rule ... no citation provided ... that denies capital gain treatment in this case. That is incorrect. The only such rule of which I am aware is contained in Code §1239 (and related Regs §1.1239-1), but the purpose of that rule is to deny capital gain treatment when there is no real change of ownership ... i.e. a sale between a husband and wife or between a taxpayer and a corporation, partnership, trust or other entity controlled by that taxpayer. It does not apply to other "related" taxpayers, such as a father and son in your case.

See the definitions of "related taxpayers" contained in the above cites to see how they apply to this type of sale or transfer.

[Burke]

Roland, you are correct. There is a pretty complete discussion of treatment of gain as ordinary income in Pub 544, Chapter 2, Page 23, and they involve the relationships between the seller and certain of his controlled entities, including corporations and partnerships, also certain trust and estate relationships with the seller-executor or seller-trustee, and an employer's association with a welfare benefit fund. The rules for non-deductible losses involve much more extended categories which are also listed in this section. Thanks for the clarification.

[Snaggletooth]

Thanks To All

Thanks to everyone for the responses.

Actually, just working through the Form 4797 answers all the questions correctly. I wanted to make sure the impact of a related party did not impact the transaction.