Question 1

Who counts as a related party for tax purposes?

Accepted Answer

Related parties include: (1) Family members: spouse, parents, children, siblings, grandparents, grandchildren, (2) Controlled entities: corporations/partnerships where you own more than 50%, (3) Grantor trusts and their beneficiaries, (4) More than 50% owned entities with common ownership.

Question 2

Why are losses on sales to related parties disallowed?

Accepted Answer

Section 267 disallows losses on sales to related parties to prevent taxpayers from selling assets at artificial losses to family members while retaining economic benefit. The loss is permanently disallowed, not deferred - you lose the tax benefit entirely.

Question 3

What if the related party later sells at a gain?

Accepted Answer

Under Section 267(d), if you sold at a loss to a related party who later sells to an unrelated buyer at a gain, the related party's gain is reduced by your previously disallowed loss. This prevents double taxation but doesn't give you the benefit.

Question 4

Are gifts to related parties taxed?

Accepted Answer

No gain or loss is recognized on gifts. The recipient takes your carryover basis. Gift tax may apply if value exceeds annual exclusion ($18,000 per recipient in 2024) or lifetime exemption ($13.61 million in 2024).

Question 5

How are below-market loans to family taxed?

Accepted Answer

If you lend to family at below-market rates, the IRS imputes interest at the Applicable Federal Rate (AFR). You have imputed interest income; the borrower may have imputed interest expense if the loan is for business/investment. Gift element exists if below AFR.

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