Losses on Sales of Property Between Related Persons

Selling Property at a Loss: Related-Party Rules

If you’re considering selling property at a loss, be aware of IRS rules restricting loss deductions in transactions between certain related parties.

In the past, some taxpayers created fake sales between relatives or entities they controlled to generate tax-deductible losses. To prevent this abuse, Congress established a blanket rule: you cannot deduct a loss on the sale or exchange of property between related parties—regardless of whether the sale was legitimate, voluntary or involuntary, or direct or indirect.

Who Is Considered a Related Party?

The IRS defines related parties to include:

  1. Family members – siblings (including half-siblings), spouse, parents, grandparents, children, and grandchildren.
  2. An individual and a corporation in which that individual owns over 50% of the stock.
  3. Two corporations in the same controlled group.
  4. A grantor and a trustee (fiduciary) of the same trust.
  5. Trustees of two trusts created by the same grantor.
  6. A trustee and a beneficiary of the same trust.
  7. A trustee and a beneficiary of two trusts created by the same grantor.
  8. A trustee and a corporation where the trust or its grantor owns over 50% of the corporation’s stock.
  9. A person and a tax-exempt organization (Section 501) that the person or their family controls.
  10. A corporation and a partnership where the same individuals own over 50% of both.
  11. Two S corporations owned more than 50% by the same people.
  12. An S corporation and a C corporation with more than 50% common ownership.
  13. An executor and a beneficiary of an estate, unless the sale fulfills a cash bequest.

Important Notes

  • The rule applies to both direct and indirect transactions. For example, you can’t deduct a loss on stock sold through a broker if a related party buys the same stock under a prearranged plan.
  • However, unrelated, coincidental trades—like a cross-trade on a public exchange—may still qualify.
  • If you’re selling multiple items in a single transaction (e.g., several blocks of stock), you must calculate gain or loss individually for each. Gains are taxable, but losses cannot offset gains from other items in the transaction.

What Happens to a Nondeductible Loss?

If a loss isn’t deductible under these rules, and the related party who bought the property later sells it at a gain, only the portion of the gain above the original nondeductible loss is taxable.