how do people think these things up!

[Hahn1040]

I think that some of you will have some fun with this one:

Client and WIFE call Friday to tell me some info that they wanted to share ahead of tax season since they feel it will impact their taxes.

Father-in-law (FIL)  had sent them the closing paperwork for some property (raw land)  that he had sold.  Client tells me that FIL had given it to him several years ago.  He doesn't know any of the details; just that  FIL had given it to him and yes he had signed some paperwork.  We discussed cost basis; he had no idea.

So... last month FIL sells the land  $265,000

• it is an Installment sale
• no interest
• payable for 5 years then a balloon
• it is payable to WIFE and her two siblings  (none of them had owned the property)

I looked up the county records for the land: 

• FIL had purchased it 1992 for $298,300;
• "sold" to Client 2003 $20,000

for the record:  Client and WIFE are happily  married, so no issues there; FIL will give them the money for any taxes due. He is not trying to take advantage of them. AND I am NOT FIL's accountant!

What fun!

[rfassett]

The loss that FIL incurred when the property was sold to daughter and son-in-law should have been disallowed under the related property rules. So your client would assume some of FIL basis. The remaining question is whether your client can report a loss on the sale. My thinking is that there would be no gain or loss for your client.

The other thought that comes to mind is with the sisters sharing in the proceeds. It is beginning to sound like your client never had constructive ownership of the property.

[Hahn1040]

Daughter did not own it

only son-in-law was on title

I'm sure he never set foot on it.  I'll bet that if he drove by there, he would not know what was "his".

[rfassett]

My comments still stand.

[SaraEA]

You should treat this as gifted property.  Regardless of what the land records say, your client didn't pay any money.  The following is the from Q&As on irs.gov but it's also stated in the regs and pubs: 

"Question

What is the basis of property received as a gift?

Answer

To figure out the basis of property you receive as a gift, you must know three amounts:

• The adjusted cost basis to the donor just before the donor made the gift to you.
• The fair market value (FMV) at the time the donor made the gift.
• The amount of any gift tax paid on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

• Your basis for figuring a gain is the same as the donor's adjusted basis, plus or minus any required adjustments to basis while you held the property.
• Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to basis while you held the property.

Note:  If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property."

You need the FMV at the time of the gift. And to file a belated gift tax return. And just for the fun of it, to investigate how FIL sold property he did not own.  Or you can take the substance over form route.  Property still belonged to FIL, he has sold it and is now gifting the proceeds to his daughters but keeping the loss for himself.

[Hahn1040]

thanks so much for your input.

I can't help but think that FIL took the loss in 2003 when he "sold" it to the son-in-law.  Why else would he have done it???  MY client had no use for a piece of raw land in a neighboring county.  Truly, I would say that FIL told him "I'm giving you a piece of land; sign here"  and Client said "yes sir."  I am fairly certain that $20,000 did not change hands.  Client would not have had that kind of cash. 

When I talked to Client last week, I had not yet looked up the county records,  so i was approaching it as a gift  since this is what client believed. I had told him to get FIL to get with his accountant to give us the cost basis.  Eager to see what FIL accountant comes back with!

County records show assessment in 2003: $158,200; 2017 it is $318,000

FIL set up the sale and arranged all of the details.  sent the paperwork to son-in law to sign.

what about the zero interest for five years?  I would think that imputed interest comes into play???

and can the note be payable to three people who did not own the property?  is it simply a gift from client to wife and siblings?  for first 5 years, it is not an issue because each third will be less than the annual limit.  At balloon time, though..... gift tax return...

again, thanks for your thoughts!

 

[Abby Normal]

How can FIL sell if he's not the owner? How exactly is the property titled? Sounds like FIL was trying to hide assets.

If FIL is keeping cash from sale, your client is making a gift to FIL.

[Roberts]

I'd check on whether the FIL took a loss and whether the IRS truly accepted it.

Selling a property to a relative at far below market price is the exact situation why deals between relatives are excluded.