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My brother and I each own 50% of the home that we inherited

Customer Question
from my mom in 2007...
My brother and I each own 50% of the home that we inherited from my mom in 2007. We started renting the home in November 2008. Now, I would like to buy his portion of the house from him. His basis was 125,000, but his 50% has now been appraised for $100,000. Two questions :) 1. Would he be able to take a $25,000 loss-less the depreciation he has already taken as a 1231 type property? Or is he considered a related party and would not be able to take any losss at all. Second question: would I show this as a second rental property for tax purposes? I'm thinking I can't add the amount I paid my brother for his half to my existing basis, since I have taken depreciation already on my half of the property. Seems to me like I would show this as a separate rental property for tax purposes. But if I were to sell it, I'm thinking that basis would be the FMV at the time of my mom's death for my portion + the $100,000 that I paid my brother for his half.
I would so appreciate you help!
Thannks!
Don in Tucson
Submitted: 7 years ago.Category: Tax
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1/2/2010
Tax Professional: RD, Certified Public Accountant (CPA) replied 7 years ago
RD
RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8,784
Experience: CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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If the fair market value of the property is gone down than and the sale between you and your brother is at the fair market value than he will be able to take any loss that he may incurr on the sale of the rental property.

 

His loss will be sale price less selling expenses less( his cost basis less depreciation allowed).

 

You can show that property as a separate 50% property (as if a new asset) and depreciate it.

 

If you were to sell the property than your basis will be 50% fmv of the property plus $100000 paid to your brother less depreciation claimed by you over the period.

 

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

 

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Customer reply replied 7 years ago

That would be great if my brother could do that, but I'm thinking he may be considered a related party and not able to use the section 1231 loss rule. Is he considered a related party?

Tax Professional: RD, Certified Public Accountant (CPA) replied 7 years ago

Yes, being a sibling his loss will be restricted. It will not be allowed to him unless the property is sold to a third party by him. You may want the sale to be structured between your brother and someone other than Members of a family( including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants.)

 

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

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Customer reply replied 7 years ago
Can you point me to where this is addressed by IRS? I want to make sure that what you are telling me is correct :) Thanks!
Tax Professional: RD, Certified Public Accountant (CPA) replied 7 years ago

Yes- Publication 544 addresses this issue.

 

Here is a link for your reference-

http://www.irs.gov/publications/p544/ch02.html#en_US_publink100072497

 

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

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Customer reply replied 7 years ago
I had seen the same reference, but I was thinking since it is section 1231 property as opposed to stock, for instance, that maybe the our being brothers did not apply. The example I see relates to stock and not residential rental property :)
Tax Professional: RD, Certified Public Accountant (CPA) replied 7 years ago

Similar rules apply to real property since the loss is considered as Sec 1231 loss.

 

 

Let me know if you have any question.

 

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

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