Hi,
I am really confused on the subject of related party loss. could some one please help?
Loss is disallowed on the sale of property to a related taxpayer. Transferee's basis is cost. on a later resale, any gain recognized by the transferee is reduced by the disallowed loss.
Ex: Bob sold stock with a basis of $4,000 to his brother Ray for $3,000, its FMV. Ray later sold the stock for $4,500. Bob's loss of $1,000 is disallowed; Ray recognizes a gain of (4,500 – 3,000) – 1,000 = 500.
In another situation, the rule is if a transfer of property is in part a gift and in part a sale the transferor recognizes a gain but not a loss. the basis for the transferee is the greater of 1) the amount paid by the transferee for the property or 2) the transferor's basis. however for the purpose of determining a loss, the basis of the property in the hands of the transferee shall not be greater than the FMV of the property at the time of the transfer.
Ex: David transfer property to his son, evan, for $30,000. the property has a basis of 90,000 and a fmv of 60,000 at date of transfer. David's realize loss of 90,000 – 30,000 = 60,000 cannot be recognize and he has made a gift of 60,000 – 30,000 = 30,000. Evan's basis for the property is 90,000. however, for the purposes of determining a loss on a later sale by Evan, the property basis is limited to its fmv of 60,000.
My confusion is: this is both a related party transfer loss situation, but one rule tells you one way to determine the basis for the transferee and another tell you differ. Where is the difference to be able to tell which rule to use to recognize the basis of the transferee?
Also, if Evan (in the 2nd situation) later sold the property for a gain will the gain not be recognize to the extent of David's loss that was disallowed (like in example 1)?
Please help! thank you!!!!
FAR: 62;79
AUD: 76
REG:67; 77
BEC: 68;66; 12/05/13
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