What Business Owners and Real Estate Investors Need to Know
Family transactions often feel safe. You know the people involved, the intent is clean, and the deal may even be priced at fair market value. Unfortunately, the tax code does not care about intent.
One of the quietest ways deductions disappear is through related party rules under IRC Section 267. There are no penalties, no audit letters at first, and no obvious red flags. Losses simply do not count. Deductions are delayed or denied. The problem often surfaces long after the transaction is completed.
Understanding these rules before entering a deal can be the difference between a clean tax result and a deduction that never materializes.
IRC Section 267 can disallow losses and defer deductions on transactions between family members and related entities, even when deals are done at fair market value.
What Section 267 Is Designed to Prevent
Section 267 exists to prevent taxpayers from creating artificial tax benefits through transactions with related parties. The focus is not whether the deal is real. The focus is whether the parties are considered related under the tax code.
If they are, losses may be disallowed and deductions delayed, even when the transaction looks arm’s length on paper.
There are two main ways Section 267 causes trouble.
1. Losses That Are Not Deductible
If you sell property at a loss to a related party, that loss is not deductible. This applies to direct sales and indirect sales.
For example, selling investment property, stock, or business assets to a family member or a related entity at a loss will generally result in a denied deduction, even if the sale price reflects fair market value.
In some cases, the loss is not gone forever. If the related party later sells the asset to an unrelated person at a gain, the previously disallowed loss may offset that gain. But if the asset is later sold at another loss, the original loss disappears permanently.
This rule catches many real estate and closely held business transactions.
2. Deductions Delayed by Accounting Method Mismatches
Section 267 also applies to unpaid expenses and interest between related parties.
If one party uses the accrual method and the related party uses the cash method, the deduction is not allowed until the income is actually reported by the recipient.
This rule commonly affects:
Rent paid to family owned entities
Interest on related party loans
Management fees between related businesses
The result is often a timing mismatch where the deduction you expected in one year does not show up until later.
Who Counts as a Related Party
This is where most surprises happen.
Related parties include:
Spouses
Parents and grandparents
Children and grandchildren
Siblings, including half siblings
Corporations, partnerships, or trusts with more than 50 percent overlapping ownership
The rules also apply through constructive ownership, meaning you may be treated as owning interests held by family members or entities you partially own.
Transactions that appear unrelated at first glance can become related once attribution rules are applied.
Why This Matters for Rentals and Family Businesses
Section 267 frequently affects:
Rental property sold or transferred within families
Business assets moved between related entities
Loans or leases between commonly owned companies
Estate and succession planning done without tax coordination
Many taxpayers only learn about the issue when a loss is denied on a return or questioned years later.
Planning Before the Deal Matters More Than the Deal Itself
Section 267 is not something you fix after the fact. Once a related party transaction is completed, the tax outcome is largely locked in.
Planning can include:
Identifying related parties early
Avoiding loss transactions between related parties
Restructuring ownership to stay below control thresholds
Selling loss assets to unrelated third parties
Timing deductions to match income recognition
These steps must happen before documents are signed.
What Comes Next in This Series
This article explains why family and related party transactions can quietly undo deductions.
In Part 2, we will cover how ownership attribution rules expand under Section 318 and why stock, entity interests, and indirect ownership can trigger tax consequences you never expected.
If you are planning a transaction involving family members, rental property, or related businesses, tax consequences should be reviewed before the deal is done. A short planning conversation can prevent permanent loss of deductions later. Talk to us today.
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