Sales Between Related Parties: When a Loss Is Not Deductible
Published November 7, 2026
Publication 550 (2025), Investment Income and Expenses, explains the special rules for sales and trades between related parties. These rules affect whether a loss can be deducted and whether a gain is capital gain. This guide is general information. It is not advice about your return.
The loss rule
The publication says you cannot deduct a loss on a sale or trade with a related party. This covers direct and indirect transactions. The rule does not apply to a distribution in complete liquidation of a corporation. The loss rule applies only to losses. It does not change the tax on a gain. A gain on a sale to a related party is still taxable under the normal rules.
The words “directly or indirectly” matter. A sale through an entity, an intermediary, or a trust can still fall under the rule.
Who is a related party
For this rule, family members are limited to these people. They are brothers and sisters, including half-brothers and half-sisters. They are a spouse. They are ancestors, such as parents and grandparents. They are lineal descendants, such as children and grandchildren.
The publication also lists related business and trust relationships. Examples include these:
- A partnership in which you own, directly or indirectly, more than 50% of the capital or profits interest.
- A corporation in which you own, directly or indirectly, more than 50% in value of the stock.
- A tax-exempt charitable or educational organization that you or a member of your family controls, directly or indirectly.
- A grantor and a fiduciary, or a fiduciary and a beneficiary, of the same trust.
Here is a general illustration, which is not an example from the publication. You sell stock at a loss to your brother. The sale is a real transaction, but the loss is not deductible under this rule.
Family sales often have other reasons, such as estate planning. The rule can still apply when the sale is fair and real.
Gain on depreciable property
A gain on a sale or trade to a related party may be ordinary income instead of capital gain. This applies when the party receiving the property can depreciate it. Depreciable property is property the buyer can write off over time, such as equipment. Chapter 2 of Publication 544 has more detail. Check the character of the gain before you agree on terms.
A sale that produces a loss you cannot deduct is still a sale. Report it on the forms that apply, and keep the records. Keep one file for each sale, with the papers that show the relationship.
Like-kind exchanges
The publication also says a like-kind exchange of business or investment real property generally recognizes no gain or loss. It also notes that this rule applies to real property trades between related parties. Check the publication before you treat such a trade as nontaxable.
Simple steps
- Before you sell to family or a related entity, check the related-party list above.
- If the sale would produce a loss, check whether the loss rule applies.
- If the buyer can depreciate the property, check the ordinary income rule.
- Keep records of the sale amount, your basis, and the relationship between the parties.
If a relationship is close to the line, such as a half-sibling or a mixed-owner entity, read the chapter 4 rules in full. The percentage tests depend on direct and indirect ownership, so family labels alone are not enough.
For related rules, see wash sale rule basics, capital loss limit and carryover, and sale of business property.
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Sources: Sources: IRS, Publication 550 (2025), Investment Income and Expenses, chapter 4, Related Party Transactions (https://www.irs.gov/pub/irs-pdf/p550.pdf) This is general information, not advice about your specific return.
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