[mbtran2003]

3 partners hold title in rental property as follows>Party A 85%, Party B 10%, Party C 5%.

Both party A & party b agree to allow party C to rightfully claim a 100% rental income & expense&depreciation. So all along for the past 6 years Party C has been claiming 100% (income/exp/dep) on party C tax return (Schedule E). Now, they want to transfer the interest of Party C and party B to party A, it posts some problem.

I did some analysis in the spreadsheet attached based on research from IRS pub but that's just my assumption of the correct way to have file the return for all parties. I don't advise all parties to amend the return for all those years. All three parties have now moved back to rental property to reside and they intended to live there for 3 years. Then, they would transfer their interest holding to party A(the rest of the interest 15%). However, Party C would still face a capital gain of 56K assuming the FMV of the property equal to cost basis because all party C files tax return on the rental property and the other two parties did not. Since it's a transfer and not a Sales, is there tax implication for party C. So COMPLICATED, HELP!!

Thanks in advance and a bunch..

[AtlantaTaxExpert]

I assume that this is real life and NOT a class assignment.

By any chance, are Parties A, B and C related, either by blood or by corporate ownership? If so, then special rules apply.

Further, you state "Both party A & party b agree to allow party C to rightfully claim a 100% rental income & expense & depreciation."

My problem is with the word rightfully! I would contend that party C, having invested ONLY 5%, is entitled to only claim 5% of the rental income & expense & depreciation.

This scenario is so complex and has so many variables that asking ANYONE to do a detailed analysis for free is a waste of time.

[mbtran2003]

Yes, this is a life case scenario. My Tax Manager gave me these scenario to do in order to get a raise. He gave me 3 tough scenario(1 on Stock Options, 1 on EIC, & this one) but this one was the most challenging. Due by Friday only a week time frame. It's very complex. The parties are related. Pardon, my verbage on Rightfully. Besides, what is the special rule regarding related parties on partnership in rental property. Anyhow, your input is appreciate. Can't help I understand.

:)

[AtlantaTaxExpert]

The related party rules are much too complex to fully explain here.

Bottom Line: Due partly to the fact that the parties are related, the IRS would disallow Party C's Schedule E once they determined the ownership percentage.

Good luck on the case.