Related Party Transactions


M

Marie Murrell

My mother sold a building held in her revocable living trust
to my brother last week. Mom's tax basis in the building is
$48,000, she sold it to my brother for $24,000. The
unsecured promissory note stated Brother would pay $400 a
month for 60 months at 0 interest to Mom (not Mom's trust).

The building was appraised 18 months ago for $20,000, and
then Mom put in $10,000 of improvements.

As I understand it, the way the agreement is now, Mom would
be denied the $24,000 loss. She would have to include
imputed interest in her income, and Brother could later sell
the building at a gain, and pay tax only on any gain in
excess of the $24,000 previously unallowed loss.

Brother is a 100% shareholder in his own corporation. Could
Mom's trust sell the building to Brother's Corporation and
avoid the "related party transaction" limitations? The 2005
Master Tax Guide List 13 "related persons". An Individual
to a Corporation that she owns nothing of does not appear to
be a related person.

Could Mom "gift" Brother the imputed interest and not claim
it as income? Because the building is probably worth about
$30,000 and she sold it for say $20,000 plus $4,000 imputed
interest (gifted) there would be a gift tax filing
requirement showing $14,000.

I have asked her to re-draw the Promissory note with
Brother's Corporation as the borrower and her trust as the
lender. I have asked that she include the building as
collateral. I suggest she state the interest at the federal
minimum rate. Have I given unsound advice?

Where do I find the Federal minimum rate??

mmurrell
 
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D

David Woods, EA, ChFC, CLU

Marie Murrell said:
My mother sold a building held in her revocable living trust
to my brother last week. Mom's tax basis in the building is
$48,000, she sold it to my brother for $24,000. The
unsecured promissory note stated Brother would pay $400 a
month for 60 months at 0 interest to Mom (not Mom's trust).

The building was appraised 18 months ago for $20,000, and
then Mom put in $10,000 of improvements.

As I understand it, the way the agreement is now, Mom would
be denied the $24,000 loss. She would have to include
imputed interest in her income, and Brother could later sell
the building at a gain, and pay tax only on any gain in
excess of the $24,000 previously unallowed loss.

Brother is a 100% shareholder in his own corporation. Could
Mom's trust sell the building to Brother's Corporation and
avoid the "related party transaction" limitations?
No.

The 2005
Master Tax Guide List 13 "related persons". An Individual
to a Corporation that she owns nothing of does not appear to
be a related person.
Except that he is related to the corporation.
Could Mom "gift" Brother the imputed interest and not claim
it as income?
Of course not.
Because the building is probably worth about
$30,000 and she sold it for say $20,000 plus $4,000 imputed
interest (gifted) there would be a gift tax filing
requirement showing $14,000.

I have asked her to re-draw the Promissory note with
Brother's Corporation as the borrower and her trust as the
lender. I have asked that she include the building as
collateral. I suggest she state the interest at the federal
minimum rate. Have I given unsound advice?
Unsound? Probably not. Without knowing what is really the
goal here, its hard to offer constructive advice.
Where do I find the Federal minimum rate??
Most research services list it, its also probably on the IRS
website.
 

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