A question for the tax experts on property in lieu of cash

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Judge Roy Bean
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A question for the tax experts on property in lieu of cash

Postby Judge Roy Bean » Wed Jan 19, 2011 8:10 pm

I'd like to confirm something before I step further into a family squabble.

Elderly relative "A" owes relative "B" about $7,000 for roof-repair, window replacement and deck labor done on "A's" summer home in preparation to sell it. Relative "B" is a sole-proprietor handyman and as far as I know, faithfully files and pays his taxes. :shock:

Relative "A's" son is suggesting that instead of paying "B" with a check, that his parents hang on to their cash and "pay" "B" by giving him a couple of pieces of artwork that are worth somewhat more than the $7,000. "B" seems amenable but is wondering what the tax implications are and "A's" son is saying he doesn't have to report it.

I have indicated I disagree. It seems to me there is a taxable barter transaction.
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Arthur Rubin
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Re: A question for the tax experts on property in lieu of ca

Postby Arthur Rubin » Wed Jan 19, 2011 8:40 pm

It looks like a taxable barter transaction to me, as well. "B" needs to have the artwork appraised at the time of transfer to determine how much is ordinary income (the value of the artwork) and how much is capital gain (the appreciation of the artwork after transfer).
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Re: A question for the tax experts on property in lieu of ca

Postby Cathulhu » Thu Jan 20, 2011 5:08 pm

I'm agreeing with Arthur--take a look at the instructions to the F. 1099-B; since this is not a commercial transaction, the fair market value of the art should be included on a 1099-Misc filed to show the payment to the handy relative. But it's taxable and reportable, as it does not meet an exception to IRC 61.
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Re: A question for the tax experts on property in lieu of ca

Postby VinnyZ » Thu Jan 20, 2011 5:09 pm

Fully taxable at the fair market value of the artwork at the time of the transfer.

Subject to income and self-employment taxes.

Generally speaking......if you do some work and someone gives you something in exchange, it is taxable.

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Re: A question for the tax experts on property in lieu of ca

Postby Arthur Rubin » Thu Jan 20, 2011 5:21 pm

To add another issue:

If it were commercial (and it doesn't seem to be) on "A"s part, would payment-in-kind require California independent contractor payment reporting on DE 542. It seems likely, but I'm not entirely sure. (Also, the California requirement DE 542 requirement can occur before the Federal 1099 requirement, as it's triggered when $600 of work is done, not necessarily the later time when it's paid.)
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Re: A question for the tax experts on property in lieu of ca

Postby jcolvin2 » Thu Jan 20, 2011 5:25 pm

Cathulhu wrote:I'm agreeing with Arthur--take a look at the instructions to the F. 1099-B; since this is not a commercial transaction, the fair market value of the art should be included on a 1099-Misc filed to show the payment to the handy relative. But it's taxable and reportable, as it does not meet an exception to IRC 61.


Don't think that there is any form 1099 filing requirement on elderly relative because the repairs were not part of elderly relative's trade or business.

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Re: A question for the tax experts on property in lieu of ca

Postby Cathulhu » Thu Jan 20, 2011 5:57 pm

Disagree. Relative B is a self-employed handyman in the given scenario.
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Re: A question for the tax experts on property in lieu of ca

Postby Arthur Rubin » Thu Jan 20, 2011 8:06 pm

It's not part of "A"s trade or business, or an organized barter club (which would file a 1099-B), so there's no 1099-MISC (or DE 542) requirement. On the other hand "B" still has to report the income, as a self-employed handyman.
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Re: A question for the tax experts on property in lieu of ca

Postby Mr. Mephistopheles » Thu Jan 20, 2011 8:10 pm

This is slightly off-topic, but not greatly so. We have a vendor who is occasionally our customer. This vendor is one of our main suppliers so we nearly perpetually have open invoices with them. When they purchase goods from us, we send an invoice and instead of issuing direct payment, they issue a credit memo to us for the amount of our invoice. We have created a Barter Account for these transactions and record their credit memos as income. Is there a specific filing requirement (1099 or otherwise) for these transactions that I'm missing?

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Re: A question for the tax experts on property in lieu of ca

Postby Arthur Rubin » Thu Jan 20, 2011 8:58 pm

http://www.irs.gov/pub/irs-pdf/i1099b.pdf wrote:A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. .... Persons who do not contract a barter exchange but who trade services do not file Form 1099-B. However, they may be required to file Form 1099-MISC.

It goes on to say that a barter exchange with fewer than 100 transactions in a year do not need to file.

The 1099-MISC instructions state that, in an exchange of services, each party reports the value of his own services (if reportable; that is, if the other party's services were associated with the first party's business.)

At first glance, I don't see a filing requirement, other than one you might have if you were to purchase their services. (There are some new paperwork requirements in ObamaCare which take effect in 2013 for purchases in 2012; in particular, payments to corporations are no longer exempt from reporting.)
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Re: A question for the tax experts on property in lieu of ca

Postby Mr. Mephistopheles » Thu Jan 20, 2011 9:15 pm

Arthur Rubin wrote:
http://www.irs.gov/pub/irs-pdf/i1099b.pdf wrote:A barter exchange is any person or organization with members or clients that contract with each other (or with the barter exchange) to jointly trade or barter property or services. .... Persons who do not contract a barter exchange but who trade services do not file Form 1099-B. However, they may be required to file Form 1099-MISC.

It goes on to say that a barter exchange with fewer than 100 transactions in a year do not need to file.

The 1099-MISC instructions state that, in an exchange of services, each party reports the value of his own services (if reportable; that is, if the other party's services were associated with the first party's business.)

At first glance, I don't see a filing requirement, other than one you might have if you were to purchase their services. (There are some new paperwork requirements in ObamaCare which take effect in 2013 for purchases in 2012; in particular, payments to corporations are no longer exempt from reporting.)


Thank you very much for the information. These exchanges only happen a few times each year so it appears that nothing special need be done. I'm going to make a note for our accountant all the same.

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Re: A question for the tax experts on property in lieu of ca

Postby Judge Roy Bean » Thu Jan 20, 2011 10:18 pm

Thanks to all who responded.

Family "problem" has been successfully defused!

:D
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Galee

Re: A question for the tax experts on property in lieu of ca

Postby Galee » Fri Feb 18, 2011 2:16 pm

Hi Judge Roy Bean,
Happy to know that your family problems are defused. Just curious how?
Did you consult some legal advisor or was it mutual consent?


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