Is a niece considered a "related party" in a sale of property?

[Gotaxes]

Taxpayer sold an inherited home at a loss to his niece (his brother's daughter.) Is this niece considered a "related party" to the sale, therefore, disallowing the loss to taxpayer?

[BobKamman]

Not according to Code Section 267(c)(4)

(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants 

If the niece is 18 years old and signed it over the next day to her father, then "substance over form" would be an issue.  

[Gotaxes]

Thank you very much for the quick response. I would like to ask opinion from you or others out there, about the gift of equity. I have been researching a lot and found different contradicting opinions.

Taxpayer inherits home and sells to niece at a loss. Since she is not his "related" party, he should be able to claim the loss. There is also involved a gift of equity to her involved in the loss. In computing Taxpayer's adjusted cost basis, which I have as FMV date of death and costs to sell. Can I also add the gift of equity to the niece to Taxpayer's adjusted cost basis? This does increase the loss he already has.

[sjrcpa]

So maybe he didn't really  dispose of it at a loss.

Does sale price plus gift of equity = FMV?

[Skylane]

sniff, sniff, sniff

[Gotaxes]

It was a loss even without consideration of gift of equity.

Sale price on 1099S:  $135,000

FMV per appraisal:  $170,000

Gift of equity $17,000

If gift of equity is added to adjusted cost basis: $170,000 + expenses to sell of $1176 + gift of equity $17,000 = $188,176 less $1099S $135,000 = $53176.

Without the gift of equity added to cost basis: $170,000 + $1176 = $171,176 less sale price of $135,000 = $36,176 loss.

Cost to sell: $

[sjrcpa]

Why would the gift of equity add to basis?

You have a part sale and a part gift.

[BobKamman]

---

@sjrcpa wrote:

Why would the gift of equity add to basis?

 Because that had to be done to defraud the mortgage company so she would qualify for the lower down payment.  If the guy is going to take the risk of being sued or jailed for fraud, he should at least get a tax deduction for it.  

---

[qbteachmt]

"+ gift of equity $17,000"

What a coincidence! It's not as if the "selling" price is manipulated from FMV, while also giving someone the exact amount of the gift exclusion as the difference. There's also an included loss amount to make the math work? It certainly does seem like, "What they qualify for mortgage + the gift limit" and ignoring FMV.

We know what @Skylane is smelling.

[Gotaxes]

I was trying to research and figure out the issue of adding the gift of equity to the cost basis of the seller. I had never done that but was advised that "this is what is done."

The gift of equity is on the settlement statement as a cost to the seller in expenses.

[sjrcpa]

it is not an expense of sale. It does not add to basis.

[qbteachmt]

"The gift of equity is on the settlement statement as a cost to the seller in expenses."

It's listed for clarity, as a reveal.

It's a debit or credit to each party. It doesn't mean it is expense for tax purposes. It's just part of settlement.

I still like investopedia articles, they describe things very clearly:

https://www.investopedia.com/terms/g/gift_of_equity.asp

"A gift of equity is the sale of a residence to a family member or someone with whom the seller has a close relationship. The price is below market value, as determined by a professional appraisal. The difference between the actual sales price and the market value of the home is the gift of equity. Most lenders allow the equity to be used toward a down payment."

[BobKamman]

And it goes without saying that since this is not an arm's-length transaction, no loss is allowed.   

[ljr]

maybe I missed this but was it a personal property or business property? If it was personal then the loss isn't deductible anyway. 

[Gotaxes]

This was personal property - inherited home - but in my research - as it was sold to a niece - a loss is allowed as the niece doesn't fall under the "related" party - not a lineal descendant.

[TaxGuyBill]

---

@Gotaxes wrote:

I was trying to research and figure out the issue of adding the gift of equity to the cost basis of the seller. I had never done that but was advised that "this is what is done."

The gift of equity is on the settlement statement as a cost to the seller in expenses.

---

Does the closing papers show a selling price of $135,000 and then subtracts the $17,000 "Gift of Equity"?

If so, the sales price is $118,000.

However, there is no deductible loss for the part-sale/part-gift situation because the selling price was less than their Adjusted Basis.

See §1.1001-1(e).

https://www.law.cornell.edu/cfr/text/26/1.1001-1#e

[garman22]

---

@BobKamman wrote:

And it goes without saying that since this is not an arm's-length transaction, no loss is allowed.   

---

I agree. While a niece might not be a related party....its certainly not arms length.