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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Re: How are real estate for stock sales handled? Date: 12/4/1998 7:32 PM
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[[Hi Roy,]]

Hi again, Mike!!!

[[ Okay, so I have a knack for posting ambiguous questions. ]]

Not necessarily. Part of the problem with this medium is that it doesn't allow for much instant "give and take". So, at times, my perception of the problem may be a bit hazy.

[[BTW the amount involved is significant
for me but not that much so for my mom.
So let's say the land involved (actually a worked farmland being leased, I know farmland
sometimes comes with strange rules) is appraised at 100k. I prefer equities over real estate. But
my mom would like the land left in the family. I'd like to sell her the land for stock if if wouldn't be
horrible for all involved.]]

OK...

[[ I know this will be taxable but I'm unsure of the details. Say the potential stocks she'd buy with are
200k(FMV) of company A where her basis is 150k or 200k(FMV)of company B where her basis
is 250k.]]

I'm sorry, but here is where I'm gettin' lost again.
Are you telling me that the property FMV is $400k, and she would give you $400k in stock (with a combined basis of $300...leaving a gain of $100k? That would certainly be taxable to her. And you didn't tell me what your basis in the property might be. So I can't really help out on your end.

[[ Must I sell the land to her at market price?]]

Must you? Not necessarily. But it is ALWAYS best to deal in reality...as close to FMV as possible. If not, IRS can always come in and call it a sham transaction. In addition, since it is a related party, there is no way that either of you could claim a loss on the sale. So make sure to keep that in the back of your mind.

[[Are there any detriments(audit!) to selling it to her
above market price or benefits to selling it at a discount?]]

I don't know what the benefit would be to sell at a greater than market price...right off the top of my head. It would just make the taxable gain greater. As far as a discount, that wouldn't necessarily be a problem, other than the disallowed loss issue (and the sham issue) that I mentioned above.

[[ Which would be a better case to but
from?]]

Since I'm still not real clear on both sides of the transaction, I'm still not sure that I can even venture a guess.

[[ Must the underlying securities be sold or can I just pay the tax liability separately?]]

It wouldn't be YOUR tax liability. If the equities belong to mom, SHE would be on the hook for the taxes. YOU would be on the hook for your taxes on your end of the sale. The problem is that unless your basis and the FMV of the property is close to your mom's basis, somebody is gonna get screwed.

You might be MUCH better off just having her sell the shares, report the gain, pay the tax, and buy the property for cash. Then you take the cash, report YOUR end of the gain, pay the tax, and buy stock with what is left over.

After all is said and done, THIS is how the entire transaction would end up anyway.

TMF Taxes
Roy
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