Author Topic: Accountants - Wash Sale for Real Estate  (Read 3075 times)

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8770
  • Registered member
Accountants - Wash Sale for Real Estate
« on: January 07, 2016, 06:40:26 PM »
Just curious about this and as these days my google-fu seems weak.

You have a $250-500k capital gains exemption for your primary residence.  Lets say you are married and sitting on a $500k gain.  Can you sell the property to your parents and then buy it back, upping your cost basis?  You'd pay a few thousand in transfer tax and maybe some other fees, but nothing close to the capital gains you avoid.

How about if I sell my house to my wife as separate property and then buy it back?

Seems like a loophole but I know the IRS often has random rules to prevent such shenanigans.

terran

  • Handlebar Stache
  • *****
  • Posts: 2139
Re: Accountants - Wash Sale for Real Estate
« Reply #1 on: January 07, 2016, 07:35:05 PM »
Wash sales apply to rebuying assets you've sold at a loss and it negates the loss. I don't know if it applies to real estate, but it wouldn't apply in your case anyway since you're talking about capital gains harvesting, not capital loss harvesting. I suspect the lack of "arms length transaction" in selling/rebuying to/from your parents or wife would mean the transaction is ignored and you'd be back where you started. 

Wile E. Coyote

  • Stubble
  • **
  • Posts: 225
Re: Accountants - Wash Sale for Real Estate
« Reply #2 on: January 07, 2016, 07:39:56 PM »
Just curious about this and as these days my google-fu seems weak.

You have a $250-500k capital gains exemption for your primary residence.  Lets say you are married and sitting on a $500k gain.  Can you sell the property to your parents and then buy it back, upping your cost basis?  You'd pay a few thousand in transfer tax and maybe some other fees, but nothing close to the capital gains you avoid.
L
How about if I sell my house to my wife as separate property and then buy it back?

Seems like a loophole but I know the IRS often has random rules to prevent such shenanigans.

The exclusion does not apply to sales to related parties.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8770
  • Registered member
Re: Accountants - Wash Sale for Real Estate
« Reply #3 on: January 07, 2016, 07:56:59 PM »
Just curious about this and as these days my google-fu seems weak.

You have a $250-500k capital gains exemption for your primary residence.  Lets say you are married and sitting on a $500k gain.  Can you sell the property to your parents and then buy it back, upping your cost basis?  You'd pay a few thousand in transfer tax and maybe some other fees, but nothing close to the capital gains you avoid.
L
How about if I sell my house to my wife as separate property and then buy it back?

Seems like a loophole but I know the IRS often has random rules to prevent such shenanigans.

The exclusion does not apply to sales to related parties.

Fun

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
Re: Accountants - Wash Sale for Real Estate
« Reply #4 on: January 07, 2016, 08:18:43 PM »
The exclusion does not apply to sales to related parties.

What's the authority for this proposition? The statute says that the exclusion does not apply to the sale of a remainder interest to certain related parties. 26 USC 121(d)(8)(B). However, the original post here isn't talking about the sale of a remainder interest; it's (presumably) talking about the sale of a freehold interest.
« Last Edit: January 07, 2016, 08:27:31 PM by Cathy »

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8770
  • Registered member
Re: Accountants - Wash Sale for Real Estate
« Reply #5 on: January 07, 2016, 08:36:06 PM »
The exclusion does not apply to sales to related parties.

What's the authority for this proposition? The statute says that the exclusion does not apply to the sale of a remainder interest to certain related parties. 26 USC 121(d)(8)(B). However, the original post here isn't talking about the sale of a remainder interest; it's (presumably) talking about the sale of a freehold interest.

Might be here, but I haven't read it yet

https://www.irs.gov/pub/irs-pdf/p544.pdf#page23

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
Re: Accountants - Wash Sale for Real Estate
« Reply #6 on: January 07, 2016, 09:29:33 PM »
IRS publications are not legal authority. E.g., Zimmerman v. Commissioner, 71 TC 367, 371 (1978), aff'd without opinion 614 F 2d 1294 (2nd Cir 1979). That said, I looked at the potentially relevant sections of that publication and I did not locate anything within that supports Wile E. Coyote's assertion regarding the principal residence exclusion.

I also took a look into the history of the rule that the principal residence exclusion does not apply to the sale of a remainder interest to certain related parties, as mentioned in my post above. The remainder interest exception was enacted by the Taxpayer Relief Act of 1997, PL 10534, 312(a), 111 Stat 788, 838-84 (Aug 5, 1997). Neither the House report (HR Report 105-148 (Jun 24, 1997)) nor the Conference Report (HR Report 105-220 (Jul 30, 1997)) discuss this exception, but I noticed something interesting: at the time of the House report, the exception made the exclusion inapplicable to sales of remainder interests and life estates to certain related parties. By the time of the Conference Report, the exception applied only to remainder interests. This appears to suggest that Congress specifically crafted a limited exception, intended to apply only to certain narrowly-described interests, and not to all interests in real estate.

Certainly Congress could have introduced a more broad exception since 1997, but I found no evidence of that. If they had done that, it would have been prudent to remove the more specific exception to avoid ambiguity, though of course Congress is not always maximally artful in its drafting of legislation.

Note: There might be other flaws with dragoncar's proposed plans as described in the original post. I comment here only on the specific claim made by Wile E. Coyote.
« Last Edit: January 07, 2016, 11:14:10 PM by Cathy »

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8770
  • Registered member
Re: Accountants - Wash Sale for Real Estate
« Reply #7 on: January 07, 2016, 09:50:59 PM »
IRS publications are practical authority, unless you feel like suing them when they fine you. 
« Last Edit: January 07, 2016, 10:08:09 PM by dragoncar »