Why Is a Loss on a Related-Party Sale Disallowed?
The rule prevents taxpayers from creating immediate deductible losses by moving property within specified related parties.
Basic rule
A loss on a sale between specified related parties can be disallowed under applicable rules.
Gain is different
Do not assume gains receive the same treatment. Related-party gain can still be recognized.
Later sale to outsider
The previously disallowed loss can affect the result when the related buyer later sells the property to an unrelated party, subject to detailed rules.
Who counts as related
The statutory definition can include certain family members, controlled corporations, partnership relationships, and other specified relationships. Everyday definitions are not enough.
The takeaway
The loss is disallowed because the transaction is not sufficiently arm's length for immediate loss recognition.
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FAQ
Are all family relationships included?
Use the statutory definition.
Are related-party gains disallowed too?
No.
Does a disallowed loss always disappear forever?
It can affect a later transaction under applicable rules.