Section 267 Related Party

[JDW]

Trust sale of residential rental property at a loss to a related party beneficiary. Is the disallowed loss only to the related party or is it also disallowed to the other unrelated party beneficiaries?

Thank you for any assistance!

[taxea]

Trust sale of residential rental property at a loss to a related party beneficiary. Is the disallowed loss only to the related party or is it also disallowed to the other unrelated party beneficiaries?

Thank you for any assistance!

Trust is the entity that sold the property. The proceeds of the sale go to the trust, the loss is recorded in the trust it does not K-1 to the beneficiaries. Anyone disagree?

[JDW]

Final return of trust, trust established due to parent death.

[Roland Slugg]

If the house that was sold was the parent's own residence and it was not rented between the time that parent died and when it was sold, then the loss is not deductible anyway. There has been much discussion about this and a lot of disagreement, but the IRS has stated this, in announcements from its GC Office.

If the property was a legitimate rental property, and it was sold at a loss, the loss would normally be deductible. However, since it was sold to a related party, the loss is not deductible, as you indicated. An estate and a beneficiary of that estate are related parties. (Code §267(b)(13)) The beneficiary may be able to reduce his gain on a later sale of the property, but only if certain conditions are met. (Code §267(d) and Regs §1.267(d)-1) That possibility only exists, however, if the house was a legitimate rental property.

Regarding the K-1, regardless of whether the loss is not allowed because it was a personal asset (probably the most likely case), or is disallowed because it was sold to a related party even though the property was a legitimate rental property, the loss does not flow through to any of the other benes. The non-deductible nature of the loss applies at the seller's level, not each bene's level.

[JDW]

Thank you Roland for your information and confirmation of non-deductibility to all beneficiaries. The house was the Parent's second residence and then converted to Rental Property at time of death, and remained a rental for over two years until sale to related party. Also, the Parent's primary residence was also converted to a residential rental at death and then sold three years later to an unrelated party at a loss...that loss should be deductible to the beneficiaries if I can figure out how to communicate all of this to the beneficiaries!! Thanks again.