Depreciation - Undivided interest property

[dkh]

father sold son 50% undivided interest in property:   house, farm buildings, 80 acres

I'm doing both father and son's tax returns.   I have questions concerning both returns.

1) for father - do I report sale using 50% of the farm buildings/land cost or do I leave his cost as is and just report a capital gain sale of "50% undivided interest" without a cost basis

2) for son -   do I enter the cost as the 100% value determined in the purchase agreement then                depreciate as 50%   or  list the 50% of farm buildings value as the cost

Am I overthinking this......          Thanks for any help you have to offer        I don't think this is in Pub17

[IRonMaN]

I checked and it isn't in Pub 17.  I even checked Pub 16 and 18 just to be safe.  I would like to help but you are talking a foreign language to me so I'm going to let someone that is multilingual help you.

[dkh]

Thanks Ironman.   I've had a lot of farm sales - first undivided interest sale I've encountered.

[rbynaker · Accepted solution]

Isn't that just Tenancy-in-Common?

https://www.thetaxadviser.com/issues/2016/nov/fractional-interests-in-property.html

So they each own 50% of the property?  The devil's in the details but you're probably splitting all of Dad's assets into two (50% basis/accum depr) and then selling the new "half".  The old half would continue to depreciate.

Son then places his new "half" of property in service and starts fresh depreciation from the purchase price.

The bigger mess is probably dealing with income/expenses going forward.  I'd punt, but then I don't like volunteering to deal with other people's headaches.

[PATAX]

I couldnt find much in four different tax reference books. but under lawprofessors.typepad.com : under agricultural law and taxation blog: there are articles that may have some information. may want to use your smart phone to access this just in case viruses,etc. 

[dkh]

I don't believe the tenancy-in-common and the undivided interest are the same.  But I don't really know that.

The father and son are not cost-sharing the farming.   

 I don't expect anyone to volunteer to deal with my headaches.   Just looking for someone with experience with this type of transaction.   I'm not finding anything helpful on the WWW

Thanks for your input. @rbynaker 

[rbynaker]

Sorry, I didn't mean to imply that you were making this my headache and certainly didn't mean to offend.  You're probably my favorite person here whose contact info I don't already have.  (I like to travel and have met at least a half-dozen folks from here in my travels.)

To clarify, this is the client's headache (of their own making), not yours!  It also likely creates a conflict of interest for you if you are considering representing both parties to a financial transaction.  The son's best interests and the father's could very well be at odds, both in this one transaction and in the activities of the joint property going forward.  No problem telling them that you're not comfortable representing them in this situation.

Rick

[dkh]

@rbynaker  I'm sorry for taking offense. I misinterpreted your comment.   This situation has me crazy.   

I think the father was looking after his financial interest and the attorney came up with this.  With the way land prices keep going up in this area, I think the father wants to be able to share in the profits if the son decides he doesn't want the farmers life in the future and they decide to sell.  If he'd just sold out right, he would miss out.   

[rbynaker]

I can't think of a worse way to accomplish . . . well, whatever they were trying to accomplish.  There's no asset protection, in fact, now if something bad happens on the property, the injured party can go probably after the assets of BOTH father and son.  It certainly doesn't save on taxes.  If dad is in poor health he's just created a capital gain for himself (when he could have gotten a step-up in basis).  Maybe if the numbers are small and Dad had NOLs to absorb?  But even then, I don't see the upside here.  <shrug>

[BobKamman]

Sounds like a case of hillbilly probate.  They share ownership (sounds like tenants in common to me) but not income and expenses?  Was there actually money paid by the son to the father for his half?  Maybe, after father gave the son a gift of the same amount?  And how did they arrive at the purchase price?  FMV?  Any gift tax return filed?  Is there a mortgage on the property?  

For farm questions, see Pub 225, which goes into 17 about 13 times.  But they don't have a chapter on Goofy Family Deals.  

[Skylane]

@taxiowa  is this something you’re familiar with?

[dkh]

There is a land contract.  Don't know how they arrived at purchase price. The son's purchase price is reasonable based on current property sales in the area. So no, no gift tax return filed.   Land contract only, no mortgage.   They do not share income/expenses.  In fact, son is putting up a poultry barn - father will not be sharing income/expenses.  Father buys/sells cattle - son does not share in the income/expenses. 

[sjrcpa]

Will father pay rent to the son for using son's undivided interest in the father's farming operation?

[rbynaker]

---

@sjrcpa wrote:

Will father pay rent to the son for using son's undivided interest in the father's farming operation?

---

Does he need to?  I think that's the insanity of an undivided interest.  Dad can use 100% of the property.  Son can use 100% of the property.  And then the chickens get trampled by the cattle and nobody can sell a 50% interest in the land because it's not marketable.

[sjrcpa]

No I don't think rent needs to be paid. I was just curious.

[dkh]

No rent being paid father to son nor son to father.  

[taxes96786]

It probably depends on how you reported income/expenses/depreciation on each parties prior returns.

[qbteachmt]

"Will father pay rent to the son for using son's undivided interest in the father's farming operation?"

I was thinking about that house. Rent for the house, no depreciation for the house, we all get to live in that house?

And what do you suppose happens when one of the individuals has some sort of judgement against them?

Ugh.

[BobKamman]

"I'm doing both father and son's tax returns."

Have you thought about doing a partnership return, also?

[dkh]

@qbteachmt  I was thinking about that house. Rent for the house, no depreciation for the house, we all get to live in that house?

Funny thing, yes they do all live in the house. Been living this way for 5years.  They are Amish - main house with doddy attached.

[taxes96786]

Probably because you didn't research the correct Pub. for this issue

[IRonMaN]

And which Pub would be the correct one?🙄

[dkh]

@taxes96786   are you serious?   or are you trying to be funny?   

What issue are you referring to...... the renting of the home or the depreciation of the undivided interest property.

Enlighten me with which Pub you think should be read.

[IRonMaN]

She can't enlighten you.  Her sole purpose here is to antagonize people with useless information.  She has done that for years and I'm guessing she will continue to do that until the day she dies.  The best advice I can give is to totally ignore her.  But she is like a case of poison ivy.  No matter how hard you try to not scratch, sometimes you have to give in to the urge.