IRC Section 267: Related Party Loss Disallowance and Buyer Offset

Under Internal Revenue Code Section 267, the related-party loss disallowance rule blocks any deduction for a loss on a sale or exchange of property between related parties, no matter what price was paid or why the sale happened.¹ The loss is gone in the year of the sale and can’t be carried forward. The only way it produces any tax benefit later is if the buyer eventually sells the same property to an unrelated third party at a gain, in which case the buyer can offset that gain by the amount of the seller’s disallowed loss.

Who Section 267 Treats as Related

The rule only bites when the buyer and seller fall inside one of the statute’s defined relationships. If you’re outside the list, the loss is deductible under the normal rules. Constructive ownership provisions can pull in shares you don’t hold directly, so the list is wider than it looks.

Family Members

Family for this purpose means your spouse, siblings (including half-siblings), parents, grandparents, children, and grandchildren.¹ In-laws, cousins, aunts, and uncles are not on the list. A father who sells rental property at a loss to his daughter cannot deduct that loss; a taxpayer who sells the same property to a cousin can.

Individuals and Their Corporations

You and a corporation are related if you own more than 50% in value of its stock, counting both direct holdings and shares attributed to you through the constructive ownership rules.¹ A majority shareholder who sells depreciated equipment to her own company gets no tax deduction for the loss.

Trusts and Estates

Several fiduciary relationships trigger Section 267. A grantor and the trust’s fiduciary are related. So are a fiduciary and a beneficiary of the same trust. And if the same person created two separate trusts, the fiduciaries and beneficiaries of those trusts are related to each other.¹

Related Entities

Two corporations in the same controlled group are related. A corporation and a partnership are related when the same people own more than 50% of the corporation’s stock and more than 50% of the partnership’s capital or profits interest.¹ Two S corporations are related if the same persons own more than 50% of each, and the same rule reaches an S corporation and a C corporation held by common owners. Closely held businesses that operate through a mix of entities routinely land inside these tests.

Constructive Ownership

Getting past the more-than-50% threshold usually involves adding up ownership that technically sits with someone else. Section 267(c) attributes to you the stock held by your spouse, siblings, parents, grandparents, children, and grandchildren. It also attributes ownership proportionately from corporations, partnerships, estates, and trusts to their owners or beneficiaries.¹

Suppose you own 30% of a corporation and your daughter owns 25%. Her shares count as yours, giving you constructive ownership of 55% and making you related to the company. One important limit: family attribution isn’t chained. Your daughter’s stock counts as yours, but it isn’t then re-attributed from you to your spouse.

What Happens to the Loss

When a related-party sale produces a loss for the seller, the loss is completely disallowed. It can’t be deducted in the year of the sale, can’t be carried forward, and doesn’t adjust anyone’s basis.¹ For the seller, the tax benefit is permanently gone.

The rule reaches every type of property: stocks, real estate, business equipment, anything you could sell at a loss. It applies whether the price was fair, whether the seller intended to save taxes, and whether the sale was direct or routed through an intermediary as part of a prearranged plan. If the parties are related and the sale produces a loss, the loss is disallowed.

Gains work the opposite way. Sell appreciated property to a related party and you report the full gain. Section 267 only blocks losses.

The Buyer’s Gain Offset

The seller’s disallowed loss doesn’t disappear entirely. If the buyer later sells the same property to an unrelated third party at a gain, the buyer can reduce the recognized gain by the amount of the seller’s disallowed loss.² This is the only mechanism that gives the disallowed loss any economic value.

An example makes the mechanics clearer. A husband owns stock with a $50,000 basis and sells it to his wife for $40,000, producing a $10,000 disallowed loss. The wife’s basis is $40,000, what she paid.

Wife later sells for $55,000. She has a $15,000 gain and can offset it with the husband’s $10,000 disallowed loss, recognizing $5,000.
Wife later sells for $45,000. She has a $5,000 gain and uses $5,000 of the disallowed loss to zero it out. The remaining $5,000 of disallowed loss is permanently lost.
Wife later sells for $35,000. She has her own $5,000 loss, which she can claim, but the husband’s disallowed loss provides nothing. The offset only works against a gain.

The disallowed loss can reduce the buyer’s gain to zero. It cannot create or enlarge a loss. Any unused portion is gone. This is where most of the real economic pain sits: families sell property between themselves at a loss expecting the buyer to recover the tax benefit down the line, and the property never appreciates enough for that to happen.

Narrow Exceptions

Section 267 carves out a limited exception for distributions in complete corporate liquidation. When a corporation distributes assets while winding down entirely, losses on those distributions are not disallowed even if the parties are related.¹ A complete liquidation ends the corporate entity, so the concern about round-tripping losses inside a controlled group falls away.

A second exception cuts against the buyer. If the original loss was disallowed under the wash sale rules of Section 1091 rather than Section 267, the buyer cannot use the gain offset rule. The same is true if the transferor’s disallowed loss would not have affected federal income tax in the first place, such as a loss from a tax-indifferent party.³

Partnerships have a parallel disallowance rule at Section 707(b). A loss on a sale between a partnership and a partner who owns more than 50% of the capital or profits interest is disallowed, and the same rule reaches sales between two partnerships under more than 50% common ownership.⁴ When Section 707(b) is what disallows the loss, the Section 267(d) gain offset still applies.

Section 267 Versus Wash Sales

Taxpayers regularly confuse Section 267 with the wash sale rules, since both can disallow losses on stock sales. The differences change the outcome.

Wash sale rules apply when the same taxpayer, or their IRA, sells securities at a loss and reacquires substantially identical securities within 30 days before or after the sale. Section 267 has no time window. If the buyer is a related party, the loss is disallowed whether the property changes hands the next day or three years later.

The consequences also part ways. A wash sale loss gets added to the basis of the replacement shares, so it survives as a deferred deduction that comes back when those shares are sold. A Section 267 loss never adjusts anyone’s basis. It survives only as an attribute available to offset the buyer’s future gain, and even that vanishes if the buyer sells at a loss or never sells.

The Companion Timing Rule for Accrued Expenses

Section 267 also contains a separate rule aimed at a different problem. Section 267(a)(2) addresses the timing mismatch that shows up when a related payer uses the accrual method and a related payee uses the cash method.¹ Left alone, the accrual payer could deduct an expense the moment it’s owed while the cash payee waits to report the income until payment actually arrives.

Under the matching rule, the payer cannot deduct the expense until the payee includes the payment in income. An accrual-basis corporation that owes its cash-basis majority shareholder a $50,000 year-end bonus cannot deduct it in December if payment doesn’t happen until January 15. The deduction lands on January 15 too, when the shareholder reports the income. The rule also applies when both parties use accrual but one is tax-exempt; the deduction waits until the expense is actually paid.

Section 267(e) stretches the matching principle to pass-through entities. For partnerships and S corporations, the timing rule reaches any owner with any capital interest, profits interest, or stock in the entity.⁵ The loss disallowance needs more than 50% ownership; the pass-through timing rule kicks in even for a 1% partner.

Reporting a Disallowed Loss

You still report the transaction. Individual taxpayers use Form 8949, enter code “L” in column (f) for a nondeductible loss other than a wash sale, and put the disallowed loss amount in column (g) as a positive number. That zeroes out the loss before it flows to Schedule D.⁶ The buyer should hold onto records of the seller’s disallowed loss, because that figure is what makes the gain offset rule work later.

For the expense-timing rule, an accrual-basis payer needs to track any amount owed to a related cash-basis payee at year-end and reverse the deduction until the payment actually happens. This adjustment is a common oversight when the payer and payee file separately and don’t coordinate.

Consequences of Getting It Wrong

Claiming a disallowed loss, or deducting an accrued expense before the related payee reports the income, produces a tax underpayment. The IRS charges interest on underpayments at the federal short-term rate plus three percentage points, reset quarterly.⁷ The accuracy-related penalty under Section 6662 adds 20% of the underpayment when the error is due to negligence or a substantial understatement.⁸

The problem is usually oversight rather than aggressive planning. An owner sells property to a family member without realizing constructive ownership makes the buyer a related party. A corporation deducts a year-end bonus to its majority shareholder on the accrual date instead of the payment date. These slip-ups tend to surface during audits of closely held businesses, where related-party transactions are constant and the edges of Section 267 aren’t always obvious.

1
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
2
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers – Section (d)
3
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers – Section (d)(2)
4
Office of the Law Revision Counsel. 26 USC 707 – Transactions Between Partner and Partnership
5
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers – Section (e)
6
Internal Revenue Service. Instructions for Form 8949
7
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
8
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments