When Family Ties Cause Tax Trouble

Family relationships and overlapping ownership can quietly sabotage well-intentioned tax planning. Internal Revenue Code Section 267 often causes the damage.

This rule does not announce itself with penalties or warnings. Instead, it erases deductions, disallows losses, and delays expenses after the transaction feels complete.

Section 267 targets transactions between related parties. The law focuses on who the parties are, not on whether the deal looks fair. When you sell property to a related person or entity at a loss, the IRS disallows the loss even if you used fair market value and arm’s-length terms.

For example, if you sell stock to a sibling at a loss, you lose the deduction simply because of the family connection.

Section 267 also disrupts expense deductions. If you use the accrual method and owe expenses or interest to a related party who uses the cash method, you cannot deduct the expense until the other party reports the income. This timing mismatch often surprises taxpayers after year-end.

The real trap lies in the attribution rules. These rules treat you as owning interests held by family members, trusts, partnerships, or corporations. As a result, transactions that appear unrelated on paper can suddenly cross the 50 percent ownership threshold, triggering related-party treatment.

Good planning avoids these outcomes. Identify related parties before you act. Review family ownership, trust interests, and entity structures together. Sell loss assets to unrelated buyers. Structure ownership to stay below control thresholds. Coordinate expense deductions with the other party’s income recognition.

Section 267 rewards foresight and punishes assumptions.

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We provide these articles as general information and not individualized tax advice.  They do not constitute a client relationship with you, and any information provided here should be applied at your own risk.