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Nondeductible Loss: Business Property Sales (2025 IRS Guide)

This guide covers “Nondeductible Loss” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

This section discusses the rules that may apply to the sale or exchange of property between related persons. If these rules apply, gains may be treated as ordinary income and losses may not be deductible. See Transfers to Spouse in chapter 1 for rules that apply to spouses.

Nondeductible Loss

A loss on the sale or exchange of property between related persons is not deductible. This applies to both direct and indirect transactions but not to distributions of property from a corporation in a complete liquidation. For the list of related persons, see Related persons next.

If a sale or exchange is between any of these related persons and involves the lump-sum sale of a number of blocks of stock or pieces of property, the gain or loss must be figured separately for each block of stock or piece of property. The gain on each item is taxable. The loss on any item is nondeductible. Gains from the sales of any of these items may not be offset by losses on the sales of any of the other items.

Related persons.

The following is a list of related persons.

  1. Members of a family, including siblings, half siblings, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

  2. An individual and a corporation if the individual directly or indirectly owns more than 50% in value of the outstanding stock of the corporation.

  3. Two corporations that are members of the same controlled group as defined in section 267(f) of the Internal Revenue Code.

  4. A trust fiduciary and a corporation if the trust or the grantor of the trust directly or indirectly owns more than 50% in value of the outstanding stock of the corporation.

  5. A grantor and fiduciary and the fiduciary and beneficiary of any trust.

  6. Fiduciaries of two different trusts and the fiduciary and beneficiary of two different trusts if the same person is the grantor of both trusts.

  7. A tax-exempt educational or charitable organization and a person who directly or indirectly controls the organization or a member of that person’s family.

  8. A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest or profits interest in the partnership.

  9. Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.

  10. Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.

  11. An executor and a beneficiary of an estate unless the sale or exchange is in satisfaction of a pecuniary bequest.

  12. Two partnerships if the same persons directly or indirectly own more than 50% of the capital interests or profits interests in both partnerships.

  13. A person and a partnership if the person directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership.

Partnership interests.

The nondeductible loss rule does not apply to a sale or exchange of an interest in the partnership between the related persons described in (12) or (13) above.

Controlled groups.

Losses on transactions between members of the same controlled group described in (3), earlier, are deferred rather than denied.

For more information, see section 267(f) of the Internal Revenue Code.

Ownership of stock or partnership interests.

In determining whether an individual directly or indirectly owns any of the outstanding stock of a corporation or an interest in a partnership for a loss on a sale or exchange, the following rules apply.

  1. Stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate, or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries. (However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.)

  2. An individual is considered as owning the stock or partnership interest directly or indirectly owned by or for his or her family. Family includes only siblings, half siblings, spouse, ancestors, and lineal descendants.

  3. An individual owning (other than by applying (2)) any stock in a corporation is considered to own the stock directly or indirectly owned by or for his or her partner.

  4. For purposes of applying (1), (2), or (3), stock or a partnership interest constructively owned by a person under (1) is treated as actually owned by that person. But stock or a partnership interest constructively owned by an individual under (2) or (3) is not treated as owned by the individual for reapplying either (2) or (3) to make another person the constructive owner of that stock or partnership interest.

Indirect transactions.

You cannot deduct your loss on the sale of stock through your broker if under a prearranged plan a related person or entity buys the same stock you had owned. This does not apply to a cross-trade between related parties through an exchange that is purely coincidental and is not prearranged.

Property received from a related person.

If, in a purchase or exchange, you received property from a related person who had a loss that was not allowable and you later sell or exchange the property at a gain, you generally recognize the gain only to the extent it is more than the loss previously disallowed to the related person. This rule applies only to the original transferee. This rule does not apply if the sale or exchange is subject to the wash sale rules of section 1091. In addition, this rule does not apply if the gain or loss with respect to the property received from a related person is not subject to federal income tax in the hands of the transferor immediately before the transfer but is subject to federal income tax in the hands of the transferee immediately after the transfer.

Example 1.

Your brother sold stock to you for $7,600. His cost basis was $10,000. His loss of $2,400 was not deductible. You later sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900 ($10,500 − $7,600). Your recognized gain is only $500, the gain that is more than the $2,400 loss not allowed to your brother.

Example 2.

Assume the same facts as in Example 1, except that you sell the stock for $6,900 instead of $10,500. Your recognized loss is only $700 ($7,600 − $6,900). You cannot deduct the loss not allowed to your brother.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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