What are the tax implications of a sibling buyout…

[MeeshkaDiane]

I will email more tomorrow - he will have a loss because he is giftiing me part of his share.  I don't know - maybe I need to pay him for his full share and then he can gift me back the 50k seperately. that is probably the easiest. I will message here more tomorrow

[Mike9241]

He can't take a loss on a sale to a related party. IRC 267(a)(1), 267 (b)(1), 267(c)(4)

The related-party loss-disallowance rule prevents recognition of losses for tax purposes. The rule applies to any sale or exchange of property, even bona fide sales at a fair market price.

[MeeshkaDiane]

Okay, so maybe I just pay Peter his full share and then he turns around and gifts me back the $50K?

[MeeshkaDiane]

Hello - I need some help to better understand the following scenario.  

2020-12-23 Peter's Basis of the family home at the time of our mother's death = $146,667 

                       Peter's Share of Capital Improvements: $4,589

2023-07-31 Peter's Adjusted Basis of the family home TODAY = $151,256 

2023-07-31 Peter's Share of the FMV of the Home = $175,000

SCENARIO NO. 1

Peter wishes to gift me $50k of his share of the 2023-07-31 FMV of the home.  

I will pay him $125,000.

- What is his basis and what is mine for tax purposes? Can you itemize the calculation and tax regs?

[Anonymous_]

Peter's basis would be exactly as you stated: 

$151,256 (fair market value at date of death plus Peter's share of improvements made).

Sections 1014(a)(1) and 1016(a)(1).

Your basis would be the greater of what you pay Peter ($125,000) or Peter's adjusted basis at the time of the transfer ($151,256) so, obviously it would be the latter.

Section 1.1015-4(a)(1)

[MeeshkaDiane]

Are you sure about that?

Someone else offered this as my basis: 

$125,000 paid to Peter

My Basis for Peter's $50k Gift: ($50k/$175k) x $151,256 = $43,216

[MeeshkaDiane]

Yes, regarding my last question above, ris said: "Peter's basis for the share that he gifts to me Mary is (50/175) x $150K, which is $42,857, so that is Mary's basis for the share she receives as a gift from Peter."

[Anonymous_]

---

@MeeshkaDiane wrote:

Are you sure about that?

---

Read the section I cited in my previous post; your (proposed) transaction is part gift/part sale.

https://www.law.cornell.edu/cfr/text/26/1.1015-4

[Anonymous_]

Also, read Section 267(d)(1).

https://www.law.cornell.edu/uscode/text/26/267

As a side note, I'm thoroughly confused as to why anyone would think that a donor (Peter) would have "basis" after a completed gift. The property at that point is gone, nothing is left; the donee (transferee) would then have basis in the property that was gifted.

[MeeshkaDiane]

yes! I am having a hard time understanding this calculation. So sorry. Can you just confirm this is correct for my basis for the $50k gift? I am very sorry 

Peters Basis for $50k Gift: ($50k/$175k) x $151,256

$     43,216

[Anonymous_]

After the transaction, you have basis in the property that was transferred, not just the value of the "gift" itself.

So, if you paid Peter $125,000 at a time when Peter's basis was $151,256 and the FMV of Peter's share was $175,000, then you would essentially take Peter's basis ($151.256) for his share, per Section 1.1015-4.