If a "gain" does not provide any cash to the seller, is capital gains tax applicable?

Question

For financing purposes on an investment property, I sold my partner all but 1% of my shares (no compensation was received). My CPA tells me that this will trigger capital gains treatment on my negative capital account. Can't my 1% ownership fully retain that negative capital account?

Answer 1

It depends on how you sold your stuff.

If you received a gain but no cash, then I think the non-cash trade rules kick in, and there are a number of ways of getting caught paying taxes when you don't have the cash to pay them.

You would have to give us the details of your trade for us to know what will be classified as boot and what can be treated as a non-cash exchange.

(With a non-cash exchange, you can trade like-kind property and not pay taxes. What you do is you transfer your "basis" from the old to the new property and you defer your capital gain. Any part of the trade that is cash, near cash, or boot will end up being taxed.)

Answer 2

Your accountant is correct. You didn't "sell" you abandoned your interest. to the extent you have used liabilities to create basis, which allowed your capital to go negative you have a gain.
If you have PALs and this is a passive activity you may well be okay. you have a capital gain and an offsetting ordinary loss. The loss is ordinary so you might have some arbtriage that will actually get you a refund.

What you have is sometimes referred to as phantom income.

Answer 3

You sold ? for no compensation ?
That is NOT a sale , that would be a gift .
You cannot sell something for nothing , it's not then a sale .
Whatever % you turned over to him would be calculated for value and your filing would be affected.
And holding 1% leaves you with NO authority or real rights .
The government will figure this is a money laundering scheme or something , unless the property is ghetto with no value to start with .

AND FYI , this

" Can't my 1% ownership fully retain that negative capital account? "

Is non-sequiter jibberish , please try to rephrase into something comprehensible .