Interactive Guide to Related Party Tax Rules
Explore how IRC Sections 267 & 7872 impact transactions between related parties through interactive scenarios.
Scenario: Asset Sale to a Related Party
The most significant rule for related-party sales involves losses. If you sell an asset to a related party for a loss, that loss is disallowed for tax purposes. However, the buyer might be able to use that disallowed loss to reduce their own taxable gain when they eventually sell the asset. This calculator demonstrates how it works.
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Tax Consequences
Visualizing the Transaction
Who is considered a "Related Party" under Section 267?
The IRS defines related parties to include:
- Family Members: Spouses, siblings, ancestors (parents, grandparents), and lineal descendants (children, grandchildren). Note: In-laws and step-relationships are NOT considered related parties.
- Controlled Entities: An individual and a corporation or partnership where they own more than 50% of the stock or interest. Complex "constructive ownership" rules apply, which can attribute ownership from one person or entity to another.
- Other Relationships: Various complex relationships involving trusts, fiduciaries, and controlled groups of corporations.
Special Gain Rule: Be careful when selling depreciable property (like a building or equipment) to a more-than-50%-owned entity. Any gain on that sale is treated as ordinary income, not capital gain, which is usually less favorable.
