Revisit-LLC property sale to son

[Margaret CPA in OH]

I'm revisiting this topic I earlier posted because I am now wondering about related party transactions. If the selling price is reduced by the equity gift, the gain will, of course, be significantly minimized and flow through to the members (parents of buyers). If the recorded selling price (market value) is used against the basis, the gain would, in my opinion, more fairly be that of an arm's length transaction.

My original inclination, and others agreed, was to deduct this gift as an adjustment to the selling price. I'm rethinking this because, as KC wrote, the buyer (kids of parent members of LLC) would have the increased basis at fmv.

Any other opinions? Thoughts? Thanks!

[Margaret CPA in OH]

Anyone care to chime in? Please?

[jainen]

>>increased basis at fmv<<

Sorry, I don't see it that way. If part of the equity were gifted, the new basis would be whatever they actually pay plus however much of the donor's basis is allocated to the gift portion. And even that might be awkward to defend in an audit.

[Margaret CPA in OH]

I actually don't care about the basis for the son but the tax basis is the or $101,000. My main concern is that, perhaps, the LLC parents boosted the selling price because it was market value. Son couldn't afford that so a gift amount was included. With that action, the recognized gain will be understated. The LLC parents received $107,923.29 of which $15,150 was the equity gift, $813.32 seller prepaids, and $4,033.81 seller's concessions (whatever that is). The mortgage proceeds were $86,708.00. This is just a tad bit confusing to me, frankly.

[jainen]

>>parents received $107,923.29 of which $15,150 was the equity gift<<

Yes, and the prepaids and concessions further reduce what they actually received. In the other thread, you said "It's almost as if the selling price was determined then figures had to be input to get there, maybe to warrant the amount of the loan?" That's exactly what it sounds like. The son simply paid off the mortgage and took over the title. I'll guess he paid it off with a new mortgage, and the FMV was fudged so this replacement loan could be written at 80%. I'll guess there was very little cash in the deal.

So just treat it as a related party transfer. The true sale price was $86,000 something--the contract price minus the gift minus the prepaids and concessions. Or just what the sellers received, which apparently was no more than needed to get rid of the loan. It does not understate the seller's gain, but it sets up the buyer with a lower basis. They can't have it both ways.

[Margaret CPA in OH]

Actually the LLC mortgaged another property for $56,000 to buy and fix up this one. Then they put another $20,000 plus the interest into it. That mortgage was not paid off. I am now in the process of determining how much of the interest is to be capitalized. The original plan, they said, was to pay off the mortgage when this property sold but that wasn't done. The balance is still on the books and is owed.

I really don't care what the buyer son's basis is. I am just trying to get the selling price correct (and clear in my brain) in order to determine the gain or what may end up being a loss. Somehow something just doesn't feel right to me. Thanks for the 80% figure, though. It wasn't a replacement loan but does avoid pmi.

I think you are correct that the selling price will be what they received, $86,708, and all the rest is make believe, more or less. Thanks again, jainen.