Beneficiaries of estates and trusts can also be

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Beneficiaries of estates and trusts can also be treated as related parties. Note In-laws are not considered related parties, although they are eligible to be claimed as dependents; nor are aunts and uncles related parties . Deferred losses create a “right of offset” which can be used to reduce a gain upon the ultimate sale of the property to an unrelated taxpayer. However, the right of offset cannot create a loss, nor make a loss greater. Holding period of the original buyer does not include the holding period of the seller; it begins on the date of purchase of property from a related party. Payments to Related Parties An accrual method C corporation is effectively placed on the cash method of accounting for purposes of deducting accrued interest and other expenses owed to a related cash method payee . No deduction is allowable until the year the amount is actually paid. This rule applies for partners and S corporation shareholders who own any interest in a partnership or S corporation (e.g., even 1%). Example
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A calendar-year corporation accrues $10,000 of salary to an employee (a 60% shareholder ) during 2017 but does not make payment until February 2018. The $10,000 will be deductible by the corporation and reported as income by the employee-shareholder in 2018. TP sold stock to S, his brother, for $1,000. TP had an adjusted basis in the stock of $2,500 but cannot deduct the realized loss of $1,500 because S is a related party . S takes a basis in the stock of $1,000. If S eventually sells the stock to an unrelated third party for $1,800, S can offset the $800 gain with $800 of the deferred loss. The remainder of the deferred loss ($700) is not recognized. EXERCISE 1 Hogan exchanged a business-use machine having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use equipment owned by Baker having a fair market value of $80,000 plus $1,000 cash. Baker assumed a $2,000 outstanding debt on the machine. What taxable gain should Hogan recognize? $0 $3,000 $10,000 $11,000 EXERCISE 2 In 2017, Joan Reed exchanges commercial real estate that she owns for other commercial real estate, plus $50,000 cash. The following additional information pertains to this transaction: Property given up by Reed Fair market value $500,000 Adjusted basis $300,000 Property received by Reed Fair market value $450,000 What amount of gain should be recognized in Reed's 2017 income-tax return? $200,000 $100,000 $50,000 $0 Exercise 3 In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of Convertible debentures. Convertible preferred stock.
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Partnership interests. Rental real estate located in different states. Exercise 4 A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of the following exchanges would qualify as nontaxable?
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  • Spring '17
  • Wendy Achiles
  • partner

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