Related Party Question #2

Collapse
X
 
  • Time
  • Show
Clear All
new posts
  • Snaggletooth
    Senior Member
    • Jun 2005
    • 3314

    #1

    Related Party Question #2

    This time Jeff and Matilda have their own daughter, Angela.

    Angela becomes college age, so Jeff buys a rental house in Lansing MI so Angela can attend Michigan State. Angela pays a minimal amount of rent to cover insurance, property taxes, and maintenance. And as expected over Angela's four undergraduate years, a substantial amount of loss (including depreciation) accumulates, $20,000.

    After four years of undergraduate study, Angela meets Ben, the young man of her dreams. Angela and Ben get married and move to New Hampshire (it is irrelevant where they move, but New Hampshire sounds romantic).

    Jeff sells the rental property to an unrelated party for a substantial gain. Can he offset the gain with the $20,000 in accumulated losses. He certainly could if the tenant had not been related.

    If an illustration would help, assume numbers as follows:

    $150,000 purchased in 2018.
    $ 16,000 in depreciation, which is part of the $20,000 in accumulated losses.
    $185,000 selling price in 2023.

    Gain, absent any other factors, is $51,000, with $35,000 in LTCG and $16,000 in s.1250 recapture.

    If he can apply the disallowed losses from related party, his gain would be $31,000. I'm thinking $15,000 in LTCG and $16,000 in s.1250 recapture.

    Can he do this? I'm thinking it would be fair, but application of tax law is not necessarily fair.
  • Lion
    Senior Member
    • Jun 2005
    • 4699

    #2
    If Angela did not pay FRV, then the house has personal use with no losses allowed.

    Actually, I haven't had any rentals, FMR or otherwise, for years.

    But I did want to commend Angela on her choice of colleges. Go Green!

    Comment

    • kathyc2
      Senior Member
      • Feb 2015
      • 1947

      #3
      Originally posted by Snaggletooth
      Can he do this? I'm thinking it would be fair, but application of tax law is not necessarily fair.
      As you described it, this is not a rental property. Purchased house for his daughter (dependent?) to live in. After daughter no longer needed it was sold. Never made available to rent to anyone but daughter.

      Comment

      • Snaggletooth
        Senior Member
        • Jun 2005
        • 3314

        #4
        Originally posted by kathyc2

        As you described it, this is not a rental property. Purchased house for his daughter (dependent?) to live in. After daughter no longer needed it was sold. Never made available to rent to anyone but daughter.
        If not rental property, then no better treatment than just having a second home. It follows that the sale would be fully taxable as LTCG, with no s.1250 recapture because it would never have been depreciable property to begin with. Thank you Kathy.

        Comment

        • Lion
          Senior Member
          • Jun 2005
          • 4699

          #5
          Was the home depreciated in error? You may have Form 3115 in your future.

          Comment

          Working...