What is Related-party losses?
In short
A loss on a sale or exchange of property between related parties is disallowed. Related parties include family members (spouse, siblings, ancestors and lineal descendants) and a corporation more than 50% owned, directly or indirectly, by the seller.
Key takeaways
- In-laws, aunts, uncles, nieces and nephews aren't related parties for this rule.
- If the buyer later sells at a gain, the disallowed loss can reduce that gain, but not create a loss.
- Gains on related-party sales are still recognized.
Example
A parent sells stock with a $5,000 basis to a child for $3,000: the $2,000 loss is disallowed. If the child later sells for $4,500, the $1,500 gain is offset and nothing is taxed.
Where it's tested
REG: Property Transactions: Gains, Losses & Like-Kind Exchanges — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A taxpayer sells stock with a basis of $10,000 to their brother for $6,000. The brother later sells the stock to an unrelated party for $9,000. How much gain does the brother recognize?