Purchase of residence at below FMV

[Art]

Taxpayer wants to purchase his brother’s personal residence at an agreed price that is below FMV. The brother is now permanently confined to a nursing home and had previously granted full power of attorney to his daughter for several years prior to his going into the nursing home. He lived in the residence until 2 years ago. He is now suffering from dementia. The daughter is willing to sell the home at below FMV for personal family reasons. Is there any reason that the taxpayer can not purchase the home at less than FMV without incurring adverse tax consequences to the taxpayer or his brother?

If the taxpayer would subsequently sell the home to his grandson after holding it for more than 12 months at a gain, would he not get capital gain treatment for the difference between his sale price (at the then FMV) and his original purchase price?

[Jiggers]

House below FMV

Taxpayer wants to purchase his brother’s personal residence at an agreed price that is below FMV. The brother is now permanently confined to a nursing home and had previously granted full power of attorney to his daughter for several years prior to his going into the nursing home. He lived in the residence until 2 years ago. He is now suffering from dementia. The daughter is willing to sell the home at below FMV for personal family reasons. Is there any reason that the taxpayer can not purchase the home at less than FMV without incurring adverse tax consequences to the taxpayer or his brother?

If the taxpayer would subsequently sell the home to his grandson after holding it for more than 12 months at a gain, would he not get capital gain treatment for the difference between his sale price (at the then FMV) and his original purchase price?

Who is paying for the nursing home?

There might be a problem if he is on Medicade or trying to get on it for nursing home expenses.

[Art]

I believe that there is some LTC insurance coverage but I will check this out. Thanks for your observations.

[Kram BergGold]

Sale and gift

I believe this transaction would have both a sale componant and a gift componant.

[Edsel]

Related Parties

There might be a huge problem if the state is paying for nursing home care, but that wasn't the question. The question centered around tax treatment.

1) The owner of the home cannot report a loss on a sale to his brother. If it was his residence for 2 years in the last 5, he can sell at be exempted from any gains, if any. Example: he purchased the home in 1964 for $30,000, it is now worth $180,000, and his brother buys for $125,000. Owner has a gain of $95,000 which can be exempted. The FMV of $180K does not enter into the picture for income tax reporting.

2) Assume same as above, except owner paid $130,000 in 1994, and brother buys for $125,000. Owner CANNOT take a $5,000 loss, even if it were business or investment property, because property was sold to a related party.

3) There is a gap of $55,000 between the sale and the FMV which should be recognized for gift tax. Gift tax is an entirely different discussion, as is the subsequent transfer to younger generations.