transferor's basis when he makes part gift/part sale on sibling real estate buyout

[MeeshkaDiane]

Hello - Can someone help me understand the transferor's basis when he makes part gift/part sale on sibling real estate buyout?

Reg 1.1015-4.

(a) General rule. Where a transfer of property is in part a sale and in part a gift, the unadjusted basis of the property in the hands of the transferee is the sum of—

(1) Whichever of the following is the greater:

(i) The amount paid by the transferee for the property, or

(ii) The transferor's adjusted basis for the property at the time of the transfer + any gift tax paid by the transferor

Example 3.
If A transfers property to his son for $30,000, and such property at the time of transfer has an adjusted basis in A's hands of $60,000 (and a fair market value of $90,000), the unadjusted basis of such property in the hands of the son is $60,000.

What should A report for income tax purposes?

A $60k loss for the difference between the FMV $90 and the $30k Paid by His Son

A $30k gift for the difference between A's $60k Adjusted Basis and the $30k Paid by His Son

[rjs · Accepted solution]

Please keep your related questions in one thread. Do not keep posting separate questions about the same issue. When information is scattered in multiple threads it's confusing and hard to follow, and hard to see the whole picture. Someone looking at this question might not see the related questions and answers in your previous thread. Please continue the discussion in the previous thread.

[Mike9241]

A $60k loss for the difference between the FMV $90 and the $30k Paid by His Son

no since no loss is reportable for a gift

in your situation even if this was a straight-out sale $30K received for $90K FMV IRC 267(c)(4) would bar a loss because it's between related taxpayers. 

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A $30k gift for the difference between A's $60k Adjusted Basis and the $30k Paid by His Son

no since a gift tax return is required when the value of gifts to any one donee in a year exceeds $17,000 2023.

the gift here is its FMV over any consideration received.  so here it would be $60 and reported on form 709 not 1040.

your scenario is different since FMV $175 Tax Basis $151 before the gift and proceeds received $125 with a gift of equity of $50.  so does A report $175 less $151 or $151 less $151 or $125 less $151 with the loss not allowed because of IRC 267(c)(4) or $125 less ($151 reduced by a prorata portion that equates to the gift (50/175*151). or something else completely. 

I agree with your latter thread you really need to sit down with a tax pro and go over everything including what you are trying to accomplish. It may be that you can accomplish goal A or B but not both. 

[Anonymous_]

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@Mike9241 wrote:

....does A report $175 less $151 or $151 less $151 or $125 less $151 with the loss not allowed because of IRC 267(c)(4) or $125 less.......

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I believe A would report the amount realized (sales price) of $125 (which is what A actually received) against a basis of $151 for a loss of $26 (which cannot be recognized per Section 267). 

Then, when the property is later sold (by the son in this case), Section 267(d)(1) would be applicable; any gain realized by the son on that sale would be reduced by the previously disallowed loss.

A would file a gift tax return for the $50 gift (difference between FMV and amount received).

Sidebar (my opinion): The foregoing is a really lousy way to structure this transaction.

[Mike9241]

@Anonymous_ what i was trying to point out and I don't know if it applies in this situation is that when a gift is made the transferor's basis is reduce and ends up as the transferee's basis.    For example, I own 100% of home and gift 50% to John Doe. doesn't my basis go down by the 50% I gifted and doesn't John Doe get that as his basis. . 

[Anonymous_]

@Mike9241 

In your hypothetical, of course, because the transferor is retaining a 50% interest in the property while the other 50% is transferred to the donee (transferee). So, half of the donor's basis is essentially transferred to the donee.

However, that's not the case as laid out by @MeeshkaDiane because the transferor (aka Peter) is transferring 100% of his share (his entire interest in the property); he will have nothing left in which to have a basis.

Note: One of the problems here is we're getting multiple and varied fact patterns across two different threads so the facts are getting totally intertwined, convoluted, and altered. @MeeshkaDiane needs to keep the facts consistent and contained in one thread (moreover, the basic question was answered in the other thread).

[MeeshkaDiane]

Hello - Do you know how to hire a Tax Pro to help me figure out the best way to handle this transaction?  When I clicked on "Expert does your taxes" it was routing me for help with an annual  return. I am need to hire a tax pro to hammer out the best way for all involved (three siblings) to manage this transaction. 

[Anonymous_]

Try the link below.

https://www.avvo.com/estate-planning-lawyer.html

Since there is a gift involved (or planned), you might want to contact a local estate planning attorney.

[MeeshkaDiane]

Isn't there someone here online that can assist offline for per diem? 

[rjs]

@MeeshkaDiane 

You can use Find a Tax Expert on the National Association of Enrolled Agents (NAEA) web site to find an Enrolled Agent. You can search by location to find people near you.

There is probably an organization of accountants in your state that would have a directory of accountants, but not all accountants are tax experts. They might have a way to search for accountants who specialize in personal income tax.

You might need both an attorney and a tax expert.

[Mike9241]

still not so sure. say i have stock FMV $500 and basis of $500 that I sell to my brother for $100.  if I'm correct IRC 1015 says his basis is $500. under IRC 267 i have a non-deductible loss on sale of $400. If it later appreciated to $900 and was sold, then under IRC 267 he could use that $400 loss to offset the gain? this is opposed to making a total gift of the stock. so his basis is $500 and if he sells for $900 a taxable gain of $400. 

[Anonymous_]

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@Mike9241 wrote:

.......If it later appreciated to $900 and was sold, then under IRC 267 he could use that $400 loss to offset the gain?

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Yes, the donee could use the loss that was not recognized to offfset the gain per Section 267(d)(1).

Also, if he makes a total gift of the stock, then his basis (assuming his basis is the same or less than FMV at the time of the gift) is transferred to the donee and he has no ability to sell the stock after the gift has been completed. The donee takes his basis and has a $400 gain if the stock is later sold for $900.

Note that if you had sold the stock to me (non-related) for $100, you could have immediately recognized a loss of $400 (assuming there was no donative intent).

The scenario you described (like the one in this thread) is why I mentioned earlier that it's not a great strategic move from a tax standpoint.