Discussion:Sale of Rental Property to related party
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Revision as of 18:41, 7 November 2009
Discussion Forum Index --> Tax Questions --> Sale of Rental Property to related party
| 6 November 2009 | |
| My client is planning to sell his rental property to his brother at the Fair Market Value. The sale of rental property will result in a gain of 45K, however he has carryover passive activity loss from prior years for 40K. Does anyone know the characteristic of the gain? Is it a passive income or ordinary income? Can I offset the gain with the carryover passive activity loss? Please keep in mind it's a related party transaction. Any suggestions? | |
| 7 November 2009 | |
| I wouldn't think the passive losses would be allowable until the brother disposed of the property to an unrelated party. Otherwise, you could just transfer property within a family to free up passive losses. I don't have a cite for this, just a gut feeling based on other related party situations. | |
| 7 November 2009 | |
| From the Passive Activity Audit Technique Guide (so easily found on the IRS website if a tax professional were to look)
Unrelated Party If a passive activity is sold to a related party, losses are not triggered (except to the extent passive income is generated). They remain with the taxpayer and are shown on Form 8582 until the activity is ultimately acquired by an unrelated third party. See IRC § 469(g)(1)(B). Aside from IRC § 469(g), IRC § 267 generally does not permit a loss on the sale of property to a related parties. The following are related parties[4]: Members of a family; An individual and a corporation in which he owns directly or indirectly more than 50 percent in value of the outstanding stock; Two corporations which are members of the same controlled group; A grantor and trustee of any trust; A trustee and a beneficiary of the trust; A corporation and a partnership if the same persons own more than 50 percent in value of the outstanding stock of the corporation and more than 50 percent of the capital interest or profits interest in the partnership; An S Corporation and another S Corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or, An S Corporation and C Corporation if the same person owns more than 50 percent in value of the outstanding stock in each corporation. | |
| 7 November 2009 | |
| The link to Kevin's doc is [1] What clarifies it for me most is the beginning of Chapter 5:
Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria: 1. Disposition of an entire interest (or substantially all[1]) 2. In a fully taxable event (where all gain/loss is realized and recognized). 3. To an unrelated party. If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss. | |
Harry Boscoe (talk|edits) said: | 7 November 2009 |
| If two unrelated parties have pretty much identical passive rental properties and they sell them to each other, can both owners deduct their suspended passive losses on the "qualifying disposition" of their properties? Seems like a slam dunk to me... | |
| 7 November 2009 | |
| Harry, sham, sham on you! ;-)
As you well know, the IRS reserves the right to recast all transactions that have no business porpoise (as Death&Taxes would say) as tax avoidance. Ironically, they be forced to qualify for a Sec. 1031 like-kind exchange, where they only recognize their only their gains. He, he he. No more PBRs today. | |
Harry Boscoe (talk|edits) said: | 7 November 2009 |
| Eastern, you'll be chucklin' to know that I actually changed my post from "exchange" to "sell" so's you could show off!
Have one on me. That's one for me, one for you, two for me, one for you, three for me, one for you. | |
