If you’re thinking about conveying property to a family member or business entity that you own, then you might need to be aware of a few certain tax implications. The IRS refers to these types of transactions as “related party transactions,” and it pays to be aware of the unique circumstances in advance!
4 Common Types of Party Transactions
Transferring assets, particularly property, within the family draws the attention of the IRS. So when you’re considering such actions, it’s a good idea to have some professional guidance on your side. In the meantime, you can review these tips to help spark some new questions!
1. Installment Sales
When selling your property over multiple years, the transaction is treated as an installment sale. This allows you to defer tax on your gain until the years in which payments are received. The exception here is if the property is sold by the related party within two years. In those cases, the remaining tax becomes immediately due. But you can address that issue by taking a look at the language in your legal agreement. Just prevent the property disposition from happening within two years.
2. Selling at a Discount
Providing a favorable deal to a related party may trigger IRS scrutiny if the property is sold well below its fair market value. You don’t want the sale to be potentially reclassified as a gift, so it’s important to mitigate that risk. Consider obtaining an appraisal before the transfer date to establish the fair market value, and then make sure you don’t have a discount that’s greater than 25 percent.
3. Transferring Remainder Interests
It’s also important to understand the impact of the tax-free home gain exclusion before transferring any interest in your home, including to trusts or estates. Transferring an interest in a home to an estate while retaining residence may hinder the estate’s eligibility for the $250,000 home sale exclusion ($500,000 for joint filers). However, if heirs meet ownership and use requirements within two out of five years, the exclusion becomes applicable.
4. Like-Kind Exchanges
Instead of selling, property owners may decide to go the route of a like-kind exchange to defer or avoid taxable gains. Recent legislation eliminates tax-free exchanges, except for qualified real estate transactions. Seeking a review of your situation before starting into any property trades with related parties is critical for these scenarios especially. The transactions can be intricate.
Need a Hand? We Can Help!
No matter the final deal, there are plenty of tax implications to consider in property transactions, and especially when working with family. If you need help assessing your options together, it’s always a good idea to consult with a tax professional.
Contacting our team at NSO & Company before finalizing your details can help you ensure that everyone has a thorough understanding of the process moving forward, helping you mitigate risks and ultimately achieve a tax-efficient transfer of assets!