Installment sale to a relative

[RWG1950]

Retired taxpayer owns a rental house & wants to sell it to a sibling. To mitigate the effect of IRMAA, he would prefer to spread the
proceeds over 2 or 3 years in an installment sale. A small amount of depreciation is involved.
Page 6-18 TTB seems to say this type of installment sale to a related party is not allowed.
At a tax seminar this week, the presenter's told me such a transaction would be allowed - subject to the 2-year disposition rule.
Not sure I understand what the difference is.
Thanks for replies.

[Rapid Robert]

You should read up on the definition of "related parties" for this purpose. It has nothing to do with family members (unless I am somehow mis-reading it).


Sec. 1239

(b) Related persons


For purposes of subsection (a), the term "related persons" means-

(1) a person and all entities which are controlled entities with respect to such person,

(2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary's interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and

(3) except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

[Rapid Robert]

I guess this is also relevant, TTB ends up pointing to both code sections, I haven't bothered to try to sort it all out, it's typical spaghetti tax code.

Sec. 453 (f) Definitions and special rules


For purposes of this section-
(1) Related person


Except for purposes of subsections (g) and (h), the term "related person" means-

(A) a person whose stock would be attributed under section 318(a) (other than paragraph (4) thereof) to the person first disposing of the property, or

(B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.

[Maribeth]

You will need to look at Sec 453(e). If you sell property to a related party on a installment sale, and the related party sells that property within two years, then the proceeds received by the related party are deemed to also have been received by the original seller, and the installment gain is accelerated accordingly. See Pub 537 for a good explanation of this and a related party does include siblings.

[Rapid Robert]

"a related party does include siblings."

I provided two code sections above that do not state this. Pub 537 also does not state this, instead it agrees with the quotes above. Can you provide some backup for your claim to the contrary?

[TaxGuyBill]

"a related party does include siblings."

I provided two code sections above that do not state this. Pub 537 also does not state this, instead it agrees with the quotes above. Can you provide some backup for your claim to the contrary?

Maybe I'm missing something, but doesn't your citation of the code section specifically state that? You cited (B) a person who bears a relationship described in section 267(b) to the person first disposing of the property.



Section 267(b)(1): (1) Members of a family, as defined in subsection (c)(4);

Section 267(c)(4): (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and



In answer to the original question, yes, it is allowed. Form 6252 even has a spot specifically for it.

[RWG1950]

Thanks for the replies.
I must be misinterpreting what the TTB 6-18 means when it states "the installment method cannot be used to report the sale of depreciable property
to a related party" IRC 1329. Does "depreciable property" differ from depreciable real property for this purpose ?
Maybe I'm incorrectly extrapolating the individuals named under the 2 year disposition rule.

[TaxGuyBill]

The "related party" for the "depreciable property" has a different definition of "related party" for the 2 year rule.

The "depreciable property" rules restricts selling between "controlled entities", such as corporations, partnerships, trusts, etc. Family members are NOT restricted for that purpose, but do fall under the 2 year rule.


So I should apologize to Rapid Robert, because he was correct in stating that siblings do NOT fall under THAT related party rule. But siblings DO fall under the related party rule for the 2 year restriction.

[Rapid Robert]

Thanx, TGB. I was planning to reply on this later today, pointing out that the pub itself has two separate sections, with the two different definitions of "related party" for the two different situations.