7835 / How is gain or loss on the sale of rental property to a related person treated?
Gain on the sale of property depreciable by the purchaser is ordinary gain if the sale is between certain related parties. For this purpose, related parties are: (1) a person and a corporation or partnership of which the person owns (directly or indirectly) a 50 percent or more interest; (2) an individual and a trust in which the individual (or the individual’s spouse) is a beneficiary having more than a remote interest; (3) generally, an executor and a beneficiary of an estate; and (4) an employer and a welfare benefit fund.1 In determining 50 percent ownership, the general rules of constructive ownership under IRC Section 267(c) apply (except paragraph (3) thereof).2
If the sale is an installment sale, the installment method of reporting is denied and the proceeds are deemed to be received in the year of sale, unless the Service is satisfied that avoidance of federal income taxes was not one of the principal purposes of the disposition3 (see Q 667).
Gain or loss on transfers between spouses or former spouses incident to a divorce is not recognized, and the basis of the property generally remains the same in the hands of the transferee as in the hands of the transferor4 (see Q 789).