I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Sell Your Building to Your Kid - Β§267(d) Related Party Losses & Estate Planning
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IRC Β§267 disallows losses on sales between related parties. πͺ For older clients sitting on lower value real estate and corresponding capital losses they will never use, Β§267 has a quieter feature that can move real money to the next generation. This is especially interesting for those subject to estate tax (estate values > $30 million). π¦ The feature is the "Β§267(d) offset." When a related-party loss is disallowed, it does not vanish. π¨ It attaches to the property in the buyer's hands. If the buyer later sells to an unrelated party at a gain, the offset reduces that gain dollar for dollar. The seller's wasted loss becomes the buyer's tax shield. For high net worth families, this can be a way to transfer value between generations in the way of capital losses. A worked exampleA retired client owns a rental bought a decade ago. Adjusted basis after depreciation is $5M. Current FMV, with a soft market and deferred maintenance, is $3M. The economic loss is $2M. The client has no capital gains this year and is already carrying losses forward. At the $3,000-per-year ordinary income offset, the $2M loss would take six centuries to use. It is stranded. The client's daughter will inherit the building anyway. We expect the property to recover to roughly $6M over the next eight years. Here is the structure π
Eight years later, the daughter's LLC sells to an unrelated buyer for $6M. Book gain is $3M. The Β§267(d) offset eats up $2M of it. LLC reports $1M of gain instead of $3M. The daughter pays tax on $1M instead of $3M, saving roughly $476,000 at the 23.8% long-term capital gains plus NIIT rate. The client also moved $3M of future appreciation out of the taxable estate. At a 40% estate tax rate that is another $1.2M of family savings, assuming the estate is taxable. A loss the client could never use turns into $1.7M of family-level tax savings. Where it works, and where it does notThe fact pattern matters. This makes sense when the older owner has no realistic path to using the loss, the asset has genuine recovery potential, and the family wants the property in the next generation long-term. Take any of those away and the trade is worse than selling to an unrelated buyer and claiming the loss directly. π€ The offset has hard limits. It's used up only on the buyer's first sale to an unrelated party (even if not all used). Hold the building forever, sell it at a loss, or sell it to another family entity, and the $2M evaporates with nothing to show for it. The appraisal has to hold up. A $3M sale price for a building the IRS later values at $4M turns the $1M gap into a gift from parent to child, with gift tax exposure. π Pay for a real appraisal and keep the comparables on file. A note in place of cash needs care. Β§453(g) shuts down installment treatment on GAIN from sales of depreciable property between controlled parties. It does not bite here because the seller has a loss, but the moment FMV creeps above basis the rule starts to matter. Document a non-tax purpose. Treasury's 2024 guidance on partnership basis-shifting between related parties signals where the IRS is hunting. This structure is not on the listed-transaction list, but the family-transaction-with-tax-benefit pattern is exactly what is being scrutinized. Clean economic substance and contemporaneous files matter. Also worth noting that Passive Activity Losses die with related party sales. β°οΈ So you'd want these to be used up by the original owner before selling. The TakeawaySuccession planning, especially for high net worth individuals, is a critical step to make sure the tax man doesn't get more than their fair share between generations. Utilizing a 267(d) offset is a strategic way to plan around tricky situations when the scenario fits just right. π«‘ Group Chat Worthy Posts π₯π²
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I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
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