Sales to Related Parties

If you sell capital assets to a close family member, or to a business entity that you own or control, you might not get all the benefits of the capital gains tax rates, and you might not be able to deduct all of your losses.

Gain on sale of depreciable property. If you sell property to a corporation or partnership of which you directly or indirectly have more than 50 percent of the control, and the property is depreciable in the hands of the party who receives it, the gain will be taxed at ordinary rates, rather than the special lower capital gains tax rate.

Losses on sales or trades of property. If you sell or trade property at a loss, other than in the complete liquidation of a corporation, you can't deduct the loss if the transaction is directly or indirectly between you and the following types of related parties:

• members of your family, including your spouse, siblings or half-siblings, ancestors, or descendants
• a partnership or corporation in which you control more than 50 percent of the interests
• a tax-exempt or charitable organization controlled by you or a member of your family

Losses on sales between certain closely related trusts or business entities controlled by the same owners are also disallowed. If you sell multiple pieces of property, and some are at a gain while others are at a loss, the gains will generally be taxable while the losses cannot be used to offset the gains. What's more, when the related person or entity sells the item, he or she (or it) won't be allowed to deduct, as a capital loss, the amount of losses that were disallowed to the original seller.

Like-kind exchanges. If you trade business or investment property to a related party, ordinarily no gain or loss is recognized (under the usual rules for like-kind exchanges ). However, if the related party sells the property he or she received within two years, both parties will be taxable on any gains they deferred through the exchange. This two-year rule does not apply if the sale occurred because of the death of either related person, an involuntary conversion (due to casualty loss, condemnation, etc.), or if the parties can establish that the main purpose of the exchange and later sale were not mainly designed to avoid taxes.