Related-party tax transactions: apply Section 267 to the seller and buyer
Identify the related parties, disallow the original loss, and preserve it for the limited later-gain rule under Section 267(d).
The decision that earns the point
Identify the taxpayer, property, and timing
For a sale or exchange of property between taxpayers related under §267, a realized loss is generally disallowed. If the related buyer later sells at a gain, §267(d) can reduce that later recognized gain by the earlier disallowed loss, but it does not create a deduction for the original seller.
Exam use
TCP can test whether parties fall within §267, current loss disallowance, and how the disallowed loss affects a later sale by the related buyer.
Your scratch-paper plan
Solve it in three moves
- 1
Establish the statutory relationship
Apply the family, entity, ownership, and attribution definitions in §267 to the exact parties.
26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers - 2
Disallow the related-party loss
Compute realized loss but do not recognize it for the seller when §267(a)(1) applies.
26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers - 3
Preserve the amount for a later sale
Use §267(d) only if the related buyer later recognizes gain on a disposition of the property.
26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers
Worked problem
Work the facts before choosing the answer
An individual sells property with a $70,000 adjusted basis to a wholly owned corporation for $50,000. Assume no exception applies and the corporation has not resold the property.
CPAPass original exam illustration using stated assumptions
Show the work
The parties are related under §267(b), and the individual realizes a $20,000 loss that §267(a)(1) disallows.
Rule source: 26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayersAnswer
Recognize no current loss. Preserve the $20,000 disallowed amount for a possible §267(d) calculation if the corporation later sells at a gain.
Rule source: 26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayersDo it now
Test the same decision with a fresh question
Start with free TCP practice. Create an account only when you want the 5-day no-card CPAPass trial and continued section practice.
The trap and the repair
Common trap
An arm's-length price does not override the statutory relationship-based loss disallowance.
Repair
Determine §267 relationship first, calculate the seller's realized but disallowed loss, and keep it separate from the buyer's basis.
Section 267 loss-sale ledger
Track seller loss separately from buyer basis
The original loss is disallowed, not transferred into the buyer's basis. A later buyer gain can be reduced only through the specific §267(d) mechanism.
| Stage | Tax treatment | Amount to preserve | Authority |
|---|---|---|---|
| Relationship test | Apply the listed family and entity relationships plus statutory ownership rules | Identity and attributed ownership of both parties | 26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers |
| Original sale at a loss | Seller computes realized loss but §267(a)(1) disallows recognition | Seller's disallowed loss | 26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers |
| Buyer later sells at a gain | Recognized gain may be reduced by the earlier disallowed loss, but not below zero | Earlier disallowed loss and later realized gain | 26 USC §267: Losses, expenses, and interest with respect to transactions between related taxpayers |
After a miss
Trace the Section 267 loss through both sales
- 1
Write the exact §267 relationship and any attributed ownership before measuring the sale.
- 2
Extend the $20,000 disallowed-loss example with a later $12,000 buyer gain and apply §267(d) without changing buyer basis.
- 3
On a second related-party sale, label seller loss, buyer basis, and later buyer gain as three separate amounts.
Your exam workflow
- Step 1Read the requirementIdentify what the task asks you to decide about related party transactions tax cpa exam.
- Step 2Sort the factsApply the family, entity, ownership, and attribution definitions in §267 to the exact parties.
- Step 3Apply the ruleCompute realized loss but do not recognize it for the seller when §267(a)(1) applies.
- Step 4Check the outputUse §267(d) only if the related buyer later recognizes gain on a disposition of the property.
Keep the next step narrow
Quick questions
What is the shortest useful answer for related party transactions tax cpa exam?
For a sale or exchange of property between taxpayers related under §267, a realized loss is generally disallowed. If the related buyer later sells at a gain, §267(d) can reduce that later recognized gain by the earlier disallowed loss, but it does not create a deduction for the original seller.
How can related party transactions tax cpa exam appear on the CPA Exam?
TCP can test whether parties fall within §267, current loss disallowance, and how the disallowed loss affects a later sale by the related buyer. The exact task can change, so identify the governing facts before applying the rule.
What is the most common mistake with related party transactions tax cpa exam?
An arm's-length price does not override the statutory relationship-based loss disallowance. Determine §267 relationship first, calculate the seller's realized but disallowed loss, and keep it separate from the buyer's basis.
Where should I practice related party transactions tax cpa exam?
After the worked example, use TCP practice for a fresh question that requires the same decision. If the miss depends on choice of entity and owner relationships, review that handoff before trying another set.
How should I review related party transactions tax cpa exam after a missed question?
Write the exact §267 relationship and any attributed ownership before measuring the sale. Extend the $20,000 disallowed-loss example with a later $12,000 buyer gain and apply §267(d) without changing buyer basis. On a second related-party sale, label seller loss, buyer basis, and later buyer gain as three separate amounts.