Hello again, Judy Bernhard, CPA and Resident Tax Manager with Killingsworth Spencer CPAs. Recently, our firm has been faced with the challenges of educating clients on the ins and outs of related party transactions. “Related Parties,” as defined by the IRS, are children, grandchildren, nieces, nephews, aunts, uncles, etc. The IRS Tax Code is designed to limit the use of transactions to manipulate tax benefits between related parties.
Though the intent in transacting business and personal matters between family members is as old as time, the IRS has “strings” attached per the tax code that can adversely impact the intent of the parties. One particular way to get into trouble with the IRS is to charge less than Fair Market Value (FMV) for rent to a family member; if expenses exceed the money collected from the rents, the property owner cannot deduct the losses for that tax year. Another “string” occurs if a property is sold to a related party for less than its full FVM consideration, the net gain on any sales proceeds will be taxed at ordinary income tax rates.
If you or anyone you know is having conversations about entering into these transactions, care needs to be exercised, and a consultation with a professional tax preparer is highly encouraged. Please feel free to give us a call at 770-552-8286 to schedule a consultation.
Disclaimer: This post is for general information only and should not be taken as legal or financial advice.