Suppose you own property you intend to transfer to your loved ones. Perhaps you are considering giving your children an ownership interest in your principal residence. Before you act, you should review the tax consequences of your decision. Specifically, tax law includes several provisions involving sales to related parties.
As you might imagine, this covers relatives like your children, grandchildren and siblings, but it also applies to business entities you own. Here are four common situations you may encounter, and tips to help you avoid tax trouble:
1. Installment sales. With an installment sale of investment or business real estate over two or more years, you can defer tax on your gain until the tax years in which payments are actually 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 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 is sold 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 build documentation that justifies the FMV.
3. Transferring remainder interests. In some cases, a homeowner may transfer an interest in a home to his or her estate while continuing to live there. Although this may meet certain objectives, the estate can't take advantage of the $250,000 home sale exclusion ($500,000 for joint filers). However, if the heirs subsequently meet the two-out-of-five-year ownership and use requirements, the exclusion becomes available.
Tip: Prior to transferring 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. Often, instead of selling business or investment property, an owner may trade for another, similar property hoping to either defer or avoid taxable gains. Under recent legislation, tax-free exchanges of like-kind properties are eliminated, 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 special exception, such as proving tax avoidance wasn't the purpose of the sale.
Tip: Related property transactions of this type can get complicated. Ask for a review of your situation before trading any property.
To discuss the specifics of a property sale to one of your family members, please call.
"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area.
Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at firstname.lastname@example.org.
For more free resources, such as Tax Rates, Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.
Monarch Accounting Group, Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720
To better serve our clients and friends, to keep you up-to-date and informed, our blog is a resource for tax tips and overall accounting related articles. We hope you find this useful!