section 121 sale to reset basis

[mactoolsix]

I'm sure Related Party Rules would disallow this, but I'm at a loss to find any reference in the IRC Code.
Father owns a residence which is close to the $500K gain - excludable under Sec 121.
Son wants to purchase the home and then resell it back to the father, allowing the gain to be excludable, and thus "resetting the clock." The father has no desire to move to a different residence.
Related Party Rules apply to disallowing Capital Gains and disallowing losses in related party transactions.
Sec 121
(8) Sales of remainder interests For purposes of this section—
(A) In general At the election of the taxpayer, this section shall not fail to apply to the sale or exchange of an interest in a principal residence by reason of such interest being a remainder interest in such residence, but this section shall not apply to any other interest in such residence which is sold or exchanged separately.


(B) Exception for sales to related parties Subparagraph (A) shall not apply to any sale to, or exchange with, any person who bears a relationship to the taxpayer which is described in section 267(b) or 707(b).
This (8) refers to "remainder interest" which is the right to own and possess the land after the fixed interest of current holder expires. thus I don't believe this applies.
Thanks, Mike Reed, EA

[TaxGuyBill]

It is a "Step Transaction" (you can Google it). Basically substance over form: it's not a real sale, it is just manipulating things to try to avoid taxes. The short answer it that it is not allowed.

https://www.irs.gov/pub/irs-wd/0826004.pdf

[mactoolsix]

Thanks Bill, as always you've come up with exactly what I was looking for!
Mike

[Burke]

I agree with TGB, and the related party rules are immaterial to this transaction.

[JON]

Since when are "related party rules" not material. I believe they can be used any time the transactions are done for the purpose of avoiding income taxes.

[Burke]

Since when are "related party rules" not material. I believe they can be used any time the transactions are done for the purpose of avoiding income taxes.

For purposes of determining if it is allowed or not -- in this particular transaction, it does not matter whether they are related or not. The transaction itself as stated is not allowable, regardless of the fact they are related.