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

Forum|Forum|2 years ago
July 30, 2023
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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

Best answer by rjs

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.

rjsAnswer

Employee

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.

*************

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_

Employee

@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.......

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. .