 Dear Tax Talk:
I am considering moving into a spec home my dad and I constructed last year. The home appraised at $534,900 at construction loan origination, about two years ago. The note due is $400,000. My dad wants to take 100 percent of the losses (approximately $100,000) in exchange for me taking the house at a cost of $400,000. Assuming that my net income from salaries and bonuses will be $190,000 in fiscal year 2007, would I be better off dumping the house for what we owe and splitting the losses or moving into the house and sitting on it until the real estate market recovers?
-- Scott
 Dear
Scott,
I assume you know that the loss is measured by the difference between the cost to build the home and its selling price. The appraised value would not enter into the equation of computing a loss. Any time a transaction occurs between related parties, there are special rules that prevent an unfair tax advantage from occurring.
In your case, the unfair advantage
would be your father recognizing a loss on the
sale of the property to you. If everyone could
do this, it would make for a free-for-all when
paying taxes. The tax law states that you cannot
deduct a loss on the sale or trade of property
if the transaction is directly or indirectly between
you and members of your family. This includes
only your brothers and sisters, half-brothers
and half-sisters, spouse, ancestors (parents,
grandparents, etc.) and lineal descendants (children,
grandchildren, etc.).
Further, when you later sell the property, you cannot recognize the loss that was not allowed to your father. Special rules mitigate gain recognition when a loss was previously disallowed. If it is not in your interest to keep the home for other reasons, it is probably best to dump it altogether.
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