Q:

Subject: help

Kerry:

 

I have a client who owns a home with his wife which otherwise would qualify for the Section 121 exclusion.  They want to "sell" their home for a promissory note to a controlled entity (LLC or S corp) and then have it developed into condos to be sold.  The entity/purchaser will be 99% owned by the seller and 1% by another.  Assume the sale is "respected" by the IRS.

 

Results:  no ability to use installment sale treatment (453(g)); ordinary income on the sale (707/1239).

 

Even given the potentially "bad" tax results above, this is no problem because 121 still excludes the gain even if it is ordinary income under 707/1239.  Do you agree??

A:

I'm not aware of any restriction on the Sec. 121 exclusion for full unrestricted sales to a related party.

The only mention of any such restriction in Pub. 523 is the following for when only a remainder interest is sold to a related party.

“Exception for sales to related persons.   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.”


Kerry Kerstetter

Follow-Up:

agreed.  Thanks!!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/17/2006 03:48:00 PM Send this post: