Figures: tax year 2026
A sale within a family can deny the seller's loss while preserving limited relief when the buyer later sells. Related parties are persons connected through a family, ownership, fiduciary, or control relationship specified by the governing tax rule.
To recall related parties for tax purposes, the preparer first identifies the transaction and then selects its relationship test. A family relationship can apply without ownership, while an entity relationship may require a specified percentage measured after permitted attribution.
Relationship comparison.
Indirect ownership percentages must use the correct denominator: corporate stock value, partnership capital, or partnership profits, as the applicable test requires. An S corporation elects pass-through taxation; a C corporation generally pays tax separately. Their relationship tests still require the specified ownership calculation.
The principal overrides are transaction-specific:
- For a parent-subsidiary controlled group under the loss rules, the relevant corporate links require more than 50% of voting power or value.
- A brother-sister controlled group uses five or fewer individuals, estates, or trusts and more than 50% identical ownership by voting power or value.
Common mistakes
- Adding different ownership denominators. The erroneous in Maya's register combines interests in two corporations; the multiplied indirect path contributes 20%.
- Rounding into control. Exactly 50% does not satisfy the more-than-50% property-loss test; an unrounded percentage controls a close result.
- Increasing the buyer's basis. Using Nina's basis produces on Owen's loss sale. His actual cost supports only the $7,000 loss.
Bottom line
- Related-party status follows the governing transaction rule, including its family definition, ownership measure, and threshold.
- Permitted entity ownership paths are multiplied, distinct holdings are combined, and prohibited reattribution is excluded.
- More than 50% differs from exactly 50%, and partnership capital and profits must be tested separately.
- A related buyer retains cost basis; the seller's disallowed loss can offset later gain but cannot create or increase a later loss.
Exam shortcut
Mark the transaction first: property loss, partnership sale, redemption ownership, cash loan, or deferred property price. Select its attribution rules before adding any holdings. Draw one line per actual ownership block. Multiply through an entity; place family-attributed interests on separate lines and cross out duplicate shares. For a resale, write buyer cost and prior denied loss in separate columns. Determine whether proceeds produce a gain before using the offset column.
The full lesson (about 7,542 words, 50 min read) adds 10 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.C1
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