You may want to help out one of your relatives, maybe a son or daughter, and think you have a way to do that while at the same time getting a great tax deduction. Your plan is to sell property such as stocks to them at a loss. Or maybe you are a fiduciary of a trust and want to sell some property cheap to the beneficiary. Possibly after selling property to your relative cheap and getting the tax deduction, you plan for them to sell the property back to you later. If any of these cases sound familiar, STOP. 26 U.S. Code § 267 forbids tax deductions for sales involving related parties. Related parties may be family members, those involved in the same estate and in some circumstances, even corporations with close ties. And it doesn’t matter if the sale is direct or indirect.
Related Parties Under the Law
26 U.S. Code § 267 defines relationships subject to the statute. Some of these include:
- Members of a family
- An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual
- Two corporations which are members of the same controlled group
- A grantor and a fiduciary of any trust
- A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts
- A fiduciary of a trust and a beneficiary of such trust
- A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts
- A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust
- An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation
- An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation
- Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate
- Other situations enumerated by the statute
Too Good of a Deal May Create Related Parties
Ok ,so what about people who are not blood relations? Sorry, but if you sell property to someone not related to you with the understanding that they will resell the property to you later or to someone related to you, the statute still applies. In fact, you could sell property to a party not related to you, and even if they do not resell it to you or someone related to you, if the price is too low, the IRS may still decide you are trying to circumvent the statute and not allow the deduction.
Nobody Will Ever Get the Tax Deduction
Let’s assume that you ignore our advice and sell some property to Cousin Clem. Clem resells, and makes some money on the deal. Clem will have to take your basis, not the basis he actually paid. Let’s draw a picture.
You have a basis of $200,000 in the property and sell it to Cousin Clem for $150,000. You cannot claim the $50,000 loss, because Clem is a related party. If Clem turns around and sells the property for $300,000, he will not have a $150,000 gain but instead will have a $100,000 gain, because he must use your basis. But if Clem sells the property at a loss for $100,000, he can only take a $50,000 loss, not a $100,000 loss. To boil it down, neither you nor Cousin Clem are ever going to be able to deduct the loss of the sale you made to him, because you are related parties.
Get Help if You Want to Sell to a Related Party
You may still want to sell to a related party, even though you know you will not benefit by tax deductions. This is a complicated area, and if you must proceed with this plan, you would be wise to consult with a local estate planning lawyer.