A taxpayer sells a rental house to their adult child. Basis $200,000, FMV $150,000. The child later sells the house to an unrelated party for $180,000. What is the child's recognized gain or loss?

Answer options:

$30,000 Gain

$20,000 Loss

$50,000 Loss

How to approach this question

Related Party Loss Rule: Parent's loss is disallowed. Child can use Parent's disallowed loss to offset future gain (but not to create a loss).

Full Answer

A.$0✓ Correct

IRC §267(d). Parent's loss of $50,000 is disallowed. Child sells for $180,000 (Cost basis $150,000). Realized gain = $30,000. This gain is reduced by the previously disallowed loss ($50,000) to zero. The remaining $20,000 of disallowed loss is lost forever.

Common mistakes

Allowing the child to deduct the remaining loss.

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