sale of residence to a related party

[susan500]

After some research and a very unsuccessful call to the IRS, I am still not sure what to do. A client came to me and told me her brother paid off her and her husband’s mortgage. In order for him to not pay gift tax, they gave him 50% of ownership of their house. Now they have technically sold 50% of their house. I cannot find whether they are eligible to exclude their gain. I am not sure if there are rules against the exclusion because they sold only 50% of their home. Also, I think they cannot exclude their gain because they sold their home to the brother, a related party.

Does anyone have experience with this? The IRS transferred me 5 times and finally said they would get back to me within 15 days.

Thanks,

Susan C. Pulaski, CPA

PS if they came to me first I would have just had the brother pay the gift tax and they could pay him back. So much for good deeds.

[jainen]

>>I cannot find whether they are eligible to exclude their gain<<

It's very clear in Section 121 that exclusion is not available unless you sell your ENTIRE interest in the property.

[susan500]

>>I cannot find whether they are eligible to exclude their gain<<

It's very clear in Section 121 that exclusion is not available unless you sell your ENTIRE interest in the property.

Isn't funny that it's so clear that the IRS couldn't even answer my question?

[mgmea]

Isn't funny that it's so clear that the IRS couldn't even answer my question?

Actually, I believe it is quite clear that under Reg 1.121-4, one can sell a partial interest in their principal residence and claim the Sec 121 exclusion on it. You can even sell it to a related party and claim the exclusion, as long as you aren't selling a "remainder interest" to a related party, which only comes about with life estates and such. You can find the text of Reg 1.121-4 at and then search for "1.121-4"

[mgmea]

>>I cannot find whether they are eligible to exclude their gain<<

It's very clear in Section 121 that exclusion is not available unless you sell your ENTIRE interest in the property.

Let's see if I can post a clearer link to Reg 1.121-4 this time, where it states in (e)(1) that the Section 121 exclusion is available for a sale of a partial interest. Reg 1.121-4

[lbbwest]

"In order for him to not pay gift tax, they gave him 50% of ownership of their house."

This is a MAJOR can of worms. (1) Are you even sure brother would be subject to gift tax, and not simply the reduction of the unified credit. Has he even heard of the unified credit? So now, brother legally owns 1/2 of the interest of the primary residence. (2) What happens if the couple gets divorced? (3) How is the title held, joint ownership? Rights of survival? (3) What happens if one of the spouses die? (Especially the one he is NOT related to.) (4) What happens if the generous brother decides he needs the cash back? Good Luck, if my crystal ball weren't in the shop I would loan it to you to describe in detail to your clients what they have done. Hillbilly tax/estate planning ROCKS! lbb

[susan500]

"In order for him to not pay gift tax, they gave him 50% of ownership of their house."

This is a MAJOR can of worms. (1) Are you even sure brother would be subject to gift tax, and not simply the reduction of the unified credit. Has he even heard of the unified credit? So now, brother legally owns 1/2 of the interest of the primary residence. (2) What happens if the couple gets divorced? (3) How is the title held, joint ownership? Rights of survival? (3) What happens if one of the spouses die? (Especially the one he is NOT related to.) (4) What happens if the generous brother decides he needs the cash back? Good Luck, if my crystal ball weren't in the shop I would loan it to you to describe in detail to your clients what they have done. Hillbilly tax/estate planning ROCKS! lbb

Have you ever not had people do something already and THEN ask you what they should have done? I did explain to them what they have done was the wrong way and that they should have let the brother file the gift tax. Hind sight my friend, hind sight.

[lbbwest]

Have you ever not had people do something already and THEN ask you what they should have done? I did explain to them what they have done was the wrong way and that they should have let the brother file the gift tax. Hind sight my friend, hind sight.

Never. All of my clients contact me when they open/close a business, get married, divorce, have children, children leave home, change jobs, change withholdings, etc. etc. etc. And BTW my friend, even my hindsight is fading with age. lbb

[susan500]

Never. All of my clients contact me when they open/close a business, get married, divorce, have children, children leave home, change jobs, change withholdings, etc. etc. etc. And BTW my friend, even my hindsight is fading with age. lbb

Wow you are really lucky. I was always told to never say never. Because you never know. This couple didn't need my services for 2 years and now they want help. You do the best you can.