Realted party sale

[Art]

Taxpayer will be purchasing his brother’s personal residence for less than FMV. The brother has been living in a nursing home for the last 18 months, but had lived in the home for many years prior. He wants his brother to purchase the home for the agreed upon price. The brother’s daughter has power of attorney for all of her fathers affairs and she has no objections to the sale. The brother can not take a loss on the sale. The brother has LTC insurance so that is not an issue. Will the transaction be considered a partial gift for the difference between FMV and the actual sales price? If so, can the brother use the estate and gift life exclusion to eliminate any tax payment? The taxpayer is purchasing the home as an investment. If he later sells the home (after owing it for more than 12 months) will he get long-term capital gain treatment? If he should decide to sell the house to his grandchild or another family member would that change the tax treatment, assuming that the house would be sold at FMV at that time? Are other considerations?

[JG EA]

Taxpayer will be purchasing his brother’s personal residence for less than FMV. The brother has been living in a nursing home for the last 18 months, but had lived in the home for many years prior. He wants his brother to purchase the home for the agreed upon price. The brother’s daughter has power of attorney for all of her fathers affairs and she has no objections to the sale. The brother can not take a loss on the sale. The brother has LTC insurance so that is not an issue. Will the transaction be considered a partial gift for the difference between FMV and the actual sales price? If so, can the brother use the estate and gift life exclusion to eliminate any tax payment? The taxpayer is purchasing the home as an investment. If he later sells the home (after owing it for more than 12 months) will he get long-term capital gain treatment? If he should decide to sell the house to his grandchild or another family member would that change the tax treatment, assuming that the house would be sold at FMV at that time? Are other considerations?

Art I found your 0 replies next to my 0 so I'll move yours to the top.
- Yes, a gift between FMV and Sale price in my opinion.
- If the brother in the nursing home doesn't have previous gifts and this gift is over the year's limit - just a reporting issue. There should be no tax unless it is a very big number.
- Yes, I say capital gain if he sells. Investment implies holding for a rise in value rather than a business of buying and selling.
- If he later sells the home to a relative there should be no problem if sold at FMV at a gain. However, if he had a loss read pub 544 page 21. Without further research this says a loss is not dedutible. Then if the relative sells at a gain they can take the unallowed loss into consideration.

[Art]

Thanks for the reply.

Situation has changed. Now the brothers are wanting to do a 1031 exchange of farm parcels. The residence is currently included in the one farm parcel to be exchanged. The problem is that the FMV of the properties are significantly different and cash to be exchanged is not sufficient to make up the difference.

Posted this on another board and suggestion was discussed to have the residence deeded separately and have the brother purchase a partial interest = to the cash to be received and then have the balance gifted to the brother. The gain on the sale of the residence can be excluded under Sec 121. This gets the house take care of. The remaining farm parcels are still not of equal value. So again a partial interest would be gifted to the acquiring brother so that the remaining values in the farm parcels would be equal. Then a 1031 exchange would be done to exchange the farm parcels. The basis in the farms parcels is relatively low, so a taxable exhange or sale is not desirable. The above approach should avoid income taxes on the exchange. The gifting brother would need to file a gift tax return, but the unified credit would offeset any gift tax. The "selling" brother's estate is small enough so that there is sufficient remaining credit available. Of course, a compentent real estate attorney should be consulted for his advise before proceeding. Any concerns, suggestions, criticism regarding the proposed transaction?

[JG EA]

Thanks for the reply.

Situation has changed. Now the brothers are wanting to do a 1031 exchange of farm parcels. The residence is currently included in the one farm parcel to be exchanged. The problem is that the FMV of the properties are significantly different and cash to be exchanged is not sufficient to make up the difference.

So there is a personal home (and it's part of land) that will be sold for the 121 and the rest gifted, and other farm land. Since care by the state is not a question then the only issue (besides the gift tax return) on this part would be the lack of FMV for the buyer for not inheriting the property later.
For the like kind exchanges on the farm land be sure and read about the related party rules (Start with pub 544 page 16.) Also I can think of another issue. Was the property converted to personal use and therefore not business property anymore? If converted to personal use then it wouldn't be able to be a like kind exchange. That's all I can think about right now. Maybe someone else will have some ideas.

[Art]

JG

Thanks again for you input.

Appriasals are being prepared for each farm parcel as well as the residence with about 2 acres which will be deeded separately from the farm parcel-the lawyer is working on this. The farm parcels have always been operating farms. All parties will be informed in writing regarding the related party rules, especially the 2 year holding period requirement.