Related Party Transactions Flashcards
What is/isn’t considered a related party?
brother/sister, spouse, parent/child, grandparent/grandchild, and entities that are more than 50% owned (directly or indirectly) by an individual, business, trust, etc.
in-laws, step relationships, aunt/uncle, niece/nephew, and cousins do NOT count as related parties
How are capital gains treated between related parties?
they are imposed on all sales of non-depreciable property (land) between all related parties except: spouses (basis is merely transferred) and an individual and a 50% or more controlled business (gain is taxed as ordinary income)
losses are disallowed on most related party transactions even if they were made at an arm’s-length FMV price
How is basis determined in related party transactions?
the basis of the buying relative depends on whether their resale price is higher, lower, or between the first relative’s basis and the lower selling price to the second relative
gain is recognized only to the extent that the future sales price exceeds the previous relative’s cost basis
loss is recognized only to the extent that the sale price to the unrelated party is lower than the acquiring relative’s original purchase price in the asset
no gain/loss is recognized when the sale price to the unrelated party is between the original cost basis and the related party purchase price
**holding period starts with the new owner’s period of ownership
