Watch Out For Sales to Related Parties

• November 9, 2011
• Paul Neiffer

Many times we have farmers come in to get their tax return prepared and tell us that they will probably not owe any tax since they sold some property at a large loss.  After reviewing the facts with them, we find out they sold the property to their son.  We then have to tell them that this loss is not deductible.  This is not a pleasant thing to do.

Remember, if you sell property to a related party, which are:

• Brothers
• Sisters
• Parents and Grandparents
• Children and grandchildren
• A business that is more than 50% owned by you and your related relatives

If the person who you sell your asset to meets one of these definitions, then one of two things happen.  If you sell the asset at a gain, you recognize the gain.  However, if you sell the asset at a loss, the loss is not recognized. 

For example, assume a farmer buys some land for $100,000 and sells it to his daughter for $75,000.  The $25,000 loss is not recognized, however, when the daughter sells it to an unrelated party for $90,000, she does not have any gain to recognize on the transaction since her sales price is less than the $100,000 paid for it by her father originally.  As long as she sells it for between $75,000 and $100,000 there is no gain.  If she sells it for $75,000 or less, then the basis is simply the price she paid for it.  Anytime you are planning on selling assets to a relative make sure to review this with your tax advisor.

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