Selling Inherited Property to Sibling

[RickinMS]

I inherited property along with 3 siblings in 2008 (as beneficiaries of the estate).  In 2022, I sold my share to another sibling.  I'm not sure if this is "arm's length" even though the sale was based upon a recent (2022) appraisal.  Is this arm's length?  If not, how should the proceeds be handled in Turbo Tax?

Some details - I received about $200K for the property in 2022; the share appraisal was about $400K in 2008.  If "arm's length"  I have about $200K capital loss.  If not, I have about $200K capital income to list where in Turbo Tax?

[Anonymous_ · Accepted solution]

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@RickinMS wrote:

In 2022, I sold my share to another sibling.  I'm not sure if this is "arm's length" even though the sale was based upon a recent (2022) appraisal.  Is this arm's length?  If not, how should the proceeds be handled in Turbo Tax?

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This scenario is covered by the related party rules of Section 267 of the Code which, among other things, disallows losses with respect to transactions between related taxpayers (which includes siblings).

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

No loss can be recognized by you; your loss is entirely disallowed regardless of whether the property was sold to your sibling at fair market value or otherwise.

Per Section 267(d), if your sibling ever does sell the property at a gain, then the previously disallowed loss can be used by your sibling to offset all or part of that gain (and note that this presumes the property was not being held for personal use for which no loss can be recognized, in any event).

[Mike9241]

what was being done with the property during the 14 years or so between inheritance and sale?

but the bad news first

If you sell property to a related party, you may not deduct your loss on the sale. The loss-disallowance rule applies to any sale or exchange with a related party, even bona fide sales at a fair market price. Under this rule, you may not deduct any loss on sale. On the other hand, you recognize in full all gains on related-party sales. IRC 267 governs losses on transactions between related parties.

The persons referred to in subsection (a) are:
(1)Members of a family, as defined in subsection (c)(4);
(2)An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
(3)Two corporations which are members of the same controlled group (as defined in subsection (f));
(4)A grantor and a fiduciary of any trust;
(5)A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;
(6)A fiduciary of a trust and a beneficiary of such trust;
(7)A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;
(8)A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;
(9)A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;
(10)A corporation and a partnership if the same persons own—
(A)more than 50 percent in value of the outstanding stock of the corporation, and
(B)more than 50 percent of the capital interest, or the profits interest, in the partnership;
(11)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;
(12)An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or
(13)Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
(c)(4)The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;

[RickinMS]

Thank you.  I should have found that myself but did not.  Reading that and other portions of the code makes it very clear what to do and how to handle the disallowance.  I made something relatively simple into an over-thought problem.

Your first question - the property was rental from 2008 to 2022.

[Anonymous_]

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@RickinMS wrote:

Your first question - the property was rental from 2008 to 2022.

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Although that might not change the ultimate result here, it does change the math since you have (or should have) circa 14 years worth of depreciation recapture (i.e., your $400,000 share basis in 2008 is reduced by the amount of depreciation that was taken or should have been taken).

[RickinMS]

Thank you.  I agree. 

Somewhat unrelated, a 2022 appraisal was used to arrive at the selling price.  I don't have the details (it's with another family member) but that member was trying to use a fair market value argument (based upon the appraisal) over the loss exclusion due to family members approach in order to have a capital loss.  I'm not leaning that way. 

[Anonymous_]

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@RickinMS wrote:

I'm not leaning that way. 

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I agree with you because what your family member is arguing runs directly against the dictates of the Tax Code (i.e., the selling price, fair market value or otherwise, is irrelevant).