Sell Rental Propery to Child

[MarkCTX]

Client wants to sell rental property to his daughter. Selling price is FMV. Depreciation recapture is inescapable. The question is whether this transaction counts as a long term capital gain or ordinary gain, since the transaction is to a related party. I seem to recall somewhere in the statutes that related party sales disqualifies the taxpayer capital gain treatment.

Mark

[Gary2]

You are correct. See section 1239 and any associated regs.

[Roland Slugg]

Let me address your assumptions and questions one at a time:

Client wants to sell rental property to his daughter. Selling price is FMV. Depreciation recapture is inescapable.

It is extremely unlikely that there will be any depreciation recapture. There will be Unrecognized §1250 Gain, but that is not the same as depreciation "recapture." Nowadays, depreciation "recapture" arises primarily from the sale of §1245 assets ... tangible personal property used in a trade or business.

The question is whether this transaction counts as a long term capital gain or ordinary gain.

It is neither. Rental property is not a capital asset, so the gain on its sale is not a capital gain. It is classified as a §1231 gain, and if owned for more than one year, will receive capital gain tax treatment.

Since the transaction is to a related party...I seem to recall somewhere in the statutes that related party sales disqualifies the taxpayer capital gain treatment.

Not in this case. Capital gain treatment is denied only for certain "related party" sales, and these are defined in Code §1239(b). A taxpayer and his daughter are not related parties for this purpose. (See Code §1239) It would really be better, IMO, if §1239 of the Code referred to the so-called related "persons," as defined in §1239(b), as related "taxpayers" instead. In fact the title of §1239 does, indeed, refer to "Related Taxpayers."

I believe the prohibition you may be thinking of is the one contained in Code §267(a) which denies a deduction for losses arising from sales or exchanges between certain related taxpayers. When there is a loss, the definition of "related taxpayers" is expanded and includes most family members, including a parent and his children.