Selling property to family creates tax complications

Selling property to family and what else requires a tax review for inherited IRAThe IRS considers selling property to a family member or loved one a related-party transaction. If you are contemplating a transaction like this, you need to review the tax consequences of your decision before you act. As you might imagine, related party transactions cover relatives like your children, grandchildren, and siblings. However, it also applies to business entities you own. Here are four everyday situations you may encounter and tips to help you avoid tax trouble:

Selling property to family

1. Installment sales. When selling your property over two or more years, your transaction is deemed an installment sale. With an installment sale, you can defer tax on your gain until the tax year in which payments are received. However, if you sell the property to a related party who disposes of it within two years, the remaining tax is due immediately!

Tip: To solve this problem, insert language in the legal agreement with your related party that does not allow the disposition of the property within two years.

2. Selling at a discount. If you’re selling a house to a related party, you may wish to give that person a sweetheart deal. Unfortunately, the IRS may reclassify the transaction as a gift if the property sells at considerably less than its fair market value (FMV). Fortunately, you have some wiggle room. If you discount the sale by less than 25 percent, you should be OK.

Tip: Err on the side of safety by having an appraisal of the property before the transfer date or building documentation that justifies the FMV.

Other options to consider

3. Transferring remainder interests. Sometimes, a homeowner may transfer an interest in a home to his or her estate while continuing to live there. Although this may meet specific objectives, the estate can’t take advantage of the $250,000 home sale exclusion ($500,000 for joint filers). However, the exclusion becomes available if the heirs subsequently meet the two-out-of-five-year ownership and use requirements.

Tip: Before transferring the interest in your home to anyone (including a trust or an estate), understand the impact of this action on the tax-free home gain exclusion.

4. Like-kind exchanges. Instead of selling a business or investment property, an owner may trade for another similar property, hoping to defer or avoid taxable gains. Recent legislation eliminates tax-free exchanges of like-kind properties, except for qualified real estate transactions. Tax is generally deferred until the replacement property is sold, but the tax law imposes a two-year holding requirement on the parties to the deal. Alternatively, you may qualify under a particular exception, such as proving tax avoidance wasn’t the purpose of the sale.

Tip: Related property transactions of this type can be complex. Ask for a review of your situation before trading any property.

Transferring assets, including property, to family gets the attention of the IRS. Should you contemplate this, contact our RRBB advisors for assistance before moving forward.


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