ExpertHard1 markMultiple Choice
CPA · Question 65 · Area IV: Property Transactions
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?
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:
A.
$0
B.
$30,000 Gain
C.
$20,000 Loss
D.
$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
A
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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