If you have ever thought about selling property to relatives or someone involved with an estate so that you can take a tax deduction, you might want to rethink your plan. A specific part of the United States tax laws forbids deductions for this kind of transaction.
The law, 26 U.S.C. § 267, says that you cannot receive a tax deduction for any loss you realize on a sale or exchange of property between “related taxpayers”. Related taxpayers include:
- Family members
- A trust creator and a trustee
- Trustees of two different trusts, if the trusts have the same creator
- A trustee and a beneficiary
- A trustee of one trust and a beneficiary of another, if the trusts have the same creator
- An estate executor estate and a beneficiary of the estate, except if the sale/exchange satisfies a bequest made in the will
26 U.S.C. § 267(b). Related taxpayers also include related corporations and people in some other close relationships.
Situations When a Sale to Related Taxpayers Might Tempt You
Maybe you were thinking about helping out a family member while also getting a tax deduction. You thought that you could sell him or her some securities or real estate at a loss. Then you thought you could take a tax deduction and also decrease the value of your taxable estate. Unfortunately, 26 U.S.C. § 267 does not allow a deduction for this kind of sale.
Alternatively, maybe you are the trustee of a family trust, and you want to sell some of the trust property to a beneficiary for cheap. You might even think that the beneficiary could sell the property back to the trust later, or sell it to a third party who can sell it back to the trust. No tax deduction is permitted under these circumstances – even if the sale is indirect using an intermediary buyer.
In addition, you might face additional consequences as a trustee for making this kind of sale. The property that you want to sell at a loss might be worth much more on the open market. By deciding to sell, you could be costing the trust and its beneficiaries a lot of money. If there are multiple beneficiaries, the ones not involved in the sale may object and ask for court intervention due to a breach of trustee duties.
In sum, you must take care when selling property – especially as a trust fiduciary – that you will realize all the tax benefits you expect. Consult an estate planning lawyer for help with tax planning as a trustee or for your own estate.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.