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I own a property that recently appraised for $350,000 in the state of Maryland that I purchased for $300,000 7 years ago. I wish to sell this property for a value of $240,000. Here are my questions:

  1. Is this legal?
  2. The state of Maryland has a transfer/recordation tax of 1.5% for each, the buyer and seller. Would this be computed on the appraised or sale value?
  3. Will this pose any problem if the buyer needs financing?
  4. Would I be able to deduct a capital loss on my tax return?

From comments: I should have mentioned - the buyer is a sibling.

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    Is the buyer related to you? Better yet - what is your relationship to the buyer? – JTP - Apologise to Monica Jul 29 '13 at 18:56
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    I should have mentioned - yes, the buyer is a sibling – rs79 Jul 29 '13 at 19:10
  • One more - did you live in the property or was it held for investment? i.e. rental? – JTP - Apologise to Monica Jul 29 '13 at 20:00
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    @Joe that may affect the basis, but not the tax treatment of the loss. Since its a related person, loss is not allowed even if its a rental. – littleadv Jul 29 '13 at 20:04
  • I was leading up to this thought - 27.5 year depreciation on rental property. 7 years is 25% or so. Bought for $300K, say land is 20%, the $240K value was depreciated down to $180K. OP now has a $240K basis, and no loss to worry over. The question is whether he has imputed income. – JTP - Apologise to Monica Jul 29 '13 at 20:10
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Is this legal?

Why not? But you might have trouble deducting losses on your taxes, especially if you sell to someone related to you in some way (which is indeed what you're doing). See the added portion below regarding dealing with "related person" (which a sibling is).

The state of Maryland has a transfer/recordation tax of 1.5% for each, the buyer and seller. Would this be computed on the appraised or sale value?

You should check with the State. In California property taxes are assessed based on sale value, but if the sale value is bogus the assessors have the right to recalculate. Since you're selling to family, the assessors will likely to intervene and set a more close to "fair market" value on the transaction, but again - check the local law.

Will this pose any problem if the buyer needs financing?

Likely, banks will be suspicious.Since you're giving a discount to your sibling, it will likely not cause a problem for financing. If it was an unrelated person getting such a discount, it would likely to have raised some questions.

Would I be able to deduct a capital loss on my tax return?

As I said - it may be a problem. If the transaction is between related people - likely not. Otherwise - not sure. Check with a professional tax adviser (EA or CPA licensed in Maryland).


You mentioned in the comment that the buyer is a sibling. IRS Publication 544 has a list of what is considered "related person", and that includes siblings. So the short answer is NO, you will not be able to deduct the loss. The tax treatment is not trivial in this case, and I suggest to have a professional tax adviser guide you on how to proceed.

Here's the definition of "related person" from the IRS pub. 544:

  1. Members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

  2. An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation.

  3. Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code.

  4. A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation.

  5. A grantor and fiduciary, and the fiduciary and beneficiary, of any trust.

  6. Fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.

  7. A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization, or a member of that person's family.

  8. A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership.

  9. Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.

  10. Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.

  11. An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest.

  12. Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships.

  13. A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership.

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    Could you add an explanation of why the bank would be suspicious? I would have thought that any bank would be glad to lend, say, 80% of $240K = 192K on a property appraised at $350K. On the other hand, in addition to the county or township assessor looking to set the property taxes on the property, the IRS (and maybe the State of Maryland) may well want to look into the matter to check whether the OP owes gift tax on an imputed gift of $350K - $240K = $110K to the purchaser. – Dilip Sarwate Jul 29 '13 at 17:39
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    @DilipSarwate I'm guessing about the banks here, from my experience they stick to appraisal reports for valuations and tend to require explanations for deviations. As a buyer, I would be suspicious as well. Someone selling at a loss way below the market value - there must be something wrong with the property. Its not that the market is frozen, and he can make a quick sale without such a discount right now. If I would be worried as a private person - banks would be worried much more with all that criticism and scrutiny around them. – littleadv Jul 29 '13 at 17:51
  • Re the gift tax - a good point. Actually it would make sense for the IRS to allow loss and then demand gift tax for unrelated persons' transaction (related persons transactions have rules where the loss is carried forward with the buyer). – littleadv Jul 29 '13 at 17:53
  • So just to summarize, there is no legality preventing the sale. I just cannot claim any capital loss. That's fine. Though, now would my sibling have to pay a Gift Tax on appraised value (minus) sale price? – rs79 Jul 30 '13 at 13:50
  • @rs79 donor pays gift tax, not donee. In this case its you. As I said, tax treatment of such a transaction is not trivial. I suggest talking to a professional. – littleadv Jul 30 '13 at 15:10
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Is this legal?

If the purpose of the sale at that price is to defraud somebody else, you could have a legal issue. For example if the purpose was to make yourself appear poorer to make you eligible for government aid; Or to increase your chances of getting a college grant; or to not have to pay money to your spouse as part of a divorce settlement; or if there is an unwritten part of the transaction for the sibling to sell the house back to in a few years when you no longer need to appear poor.

The answer by @littleadv covers the tax complications.

I do have one additional point. The sale can't be a short sale. The bank will never approve. The short sale can only be approved when the bank is convinced that there are no viable purchasers at a level to get all their money back. Your sibling is not an arms length transaction.

  • >The sale can't be a short sale. The bank will never approve. Actually, the OP never mentioned any mortgage on the property that needs to be paid off. – Dilip Sarwate Jul 29 '13 at 23:14
  • actually we don't even know if it was an investment property. – mhoran_psprep Jul 29 '13 at 23:38
  • The intended sale price (240k) of the property more than covers the balance of the owed mortgage. – rs79 Jul 30 '13 at 13:45

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