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Related party gain or loss?


mli

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Related Party sale – losses aren’t deductible. No problem there.

But what happens in a related property sale of rental real estate at an overall gain, if there is (1) a loss on the land, but (2) a gain on the building? Is the loss on the land still disallowed?


For example:

• Related party sale total net gain =$10,000.  Reported on 4797 it is made up of:

            • Gain on building = $20,000

           • loss on land =$10,000

Does the taxpayer have to recognize a $20,000 gain on the transaction and loss on land is disallowed.

Or does the taxpayer recognize a $10,000 gain.

If this was not depreciable property (vacation home) there would only be “one total value” and there would be no disallowed loss .

It seems to me the property is only split to calculate depreciation, but does that create a situation where the loss is disallowed? 

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30 minutes ago, mli said:

Related Party sale – losses aren’t deductible. No problem there.

But what happens in a related property sale of rental real estate at an overall gain, if there is (1) a loss on the land, but (2) a gain on the building? Is the loss on the land still disallowed?

 

Netting is NOT allowed under sec 267 even if they are part of the same transaction. Gain is recognized and loss is disallowed.

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On 10/28/2018 at 1:25 PM, jklcpa said:

 

 

Netting is NOT allowed under sec 267 even if they are part of the same transaction. Gain is recognized and loss is disallowed.

At the outset of ownership, taxpayers are routinely not well-versed enough to allocate a valid portion to the cost of land.  Preparers are not either, often having no knowledge of real estate values in question.  Some of us use 10%, some us  20%, some vary with two-story structures, etc.  Notices from local property tax assessors are not much help, and real estate contracts for sale do not usually disclose the value of the land separately.

All to say that both the selling price and original cost of land are usually subject to flimsy documentation.  To comply with Sec 267, should we use the same allocation % for the selling price as we do for original allocation?  (In absence of other information)

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Get the assessment from the town/county.  Somewhere (usually once a year, sometimes every bill) there will be a breakdown of land value versus building value.  You can usually go back a few years with the online databases.  If you find the split, use whatever percentage it was on the original sales price.  

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17 hours ago, LaVergne said:

...should we use the same allocation % for the selling price as we do for original allocation?  (In absence of other information)

Hi, LaVergne, welcome to the Board!  Absent more reliable information,  I would use the property assessor's ratio at sale time to assign a percentage to land at sale time.  It could, and maybe even likely will, be different than the ratio was at the time of purchase.  We hope that people we pay to assess property values can be relied upon for the proper ratio of land to total, even if they miss what the parcel is worth to a willing buyer.  

I totally understand that using the county assessor's ratio may not be ideal, but let's be honest here, my clients are not going to come up with a more accurate allocation.  Nor will they hire an expert to do it.  They will either throw a dart at it, try to figure out how to manipulate the ratio to their advantage, or worse, try to get me to manipulate it.  No thanks, I'll go with the paid county official's opinion at the time of the transaction. 

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Is the land separate from the building? I mean, is it a separate lot? Could the building have been sold without the land? 

If the rental property is on top of the land, and cannot be sold without the land, I never would have thought to break it apart in the sales transaction and treat it as two parts. I would have netted it as one transaction. It's the sale of rental property, albeit to a related party, but still, it's the sale of rental property. Boom. Done. Am I wrong? 

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8 minutes ago, Possi said:

Is the land separate from the building? I mean, is it a separate lot? Could the building have been sold without the land? 

If the rental property is on top of the land, and cannot be sold without the land, I never would have thought to break it apart in the sales transaction and treat it as two parts. I would have netted it as one transaction. It's the sale of rental property, albeit to a related party, but still, it's the sale of rental property. Boom. Done. Am I wrong? 

Yes, they must be separated.  In general:

The land isn't depreciable property so it would go on the 4797 in part 1 as sec 1231 property.

The building (sec 1250) and tangible personal property (1245) reporting is each separate and its reporting depends on whether it's short or long term AND also whether sold for a gain or a loss:

  • Short term gain and losses of these type are reported in part 2,
  • Long term and sold at a loss goes in part 1,
  • Long term and sold at a gain goes in part 3

Sale of real or tangible that was deducted under the de minimis safe harbor - all goes in part 2

 

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17 minutes ago, jklcpa said:

Yes, they must be separated.  In general:

The land isn't depreciable property so it would go on the 4797 in part 1 as sec 1231 property.

The building (sec 1250) and tangible personal property (1245) reporting is each separate and its reporting depends on whether it's short or long term AND also whether sold for a gain or a loss:

  • Short term gain and losses of these type are reported in part 2,
  • Long term and sold at a loss goes in part 1,
  • Long term and sold at a gain goes in part 3

Sale of real or tangible that was deducted under the de minimis safe harbor - all goes in part 2

 

Is everything being separated because it was sold to a related party? The sales I have don't detail the land like that. When detailed properly, the software reduces the depreciable building by the land, and upon selling, adds the land back into the basis. 

ohlordipray

 

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16 minutes ago, Possi said:

Is everything being separated because it was sold to a related party? The sales I have don't detail the land like that. When detailed properly, the software reduces the depreciable building by the land, and upon selling, adds the land back into the basis. 

ohlordipray

 

I don't know exactly how you've entered the assets initially or what you mean by "When detailed properly, the software reduces the depreciable building by the land...."

I've always reported it as I described and my depreciation schedules have the land entered as a separate asset, so even with bulk sales entry, I indicate the proper code section that applies and it is reported separately.  

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On 10/29/2018 at 4:17 PM, Catherine said:

If you find the split, use whatever percentage it was on the original sales price. 

That was specifically for the basis part - not the sale part.  Assuming she can find both.  If she can only find one..... you go with what you can back up.  Sorry for being sloppy in my wording.

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22 hours ago, Possi said:

Is everything being separated because it was sold to a related party? The sales I have don't detail the land like that. When detailed properly, the software reduces the depreciable building by the land, and upon selling, adds the land back into the basis. 

ohlordipray

 

 

No things are not separated due to related property rules.  Things are separated simply to handle depreciation and deprecation recapture.

I think you have hit on my original point. 

Consider 2 scenarios entered into ATX software:

In both scenarios the facts are the same: a Related party sale total net gain =$10,000.  (Made up of:  • Gain on building = $20,000  • loss on land =$10,000)

==> Scenario 1 Sale of vacation home - Gain recognized on the related party sale is $10,000.

==> Scenario 2 Sale of rental home - Gain recognized on related party sale is $20,000.

I understand the no netting rule. This result seems inconsistent.  That was why I asked the question. 

 

 

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