IRS Publication 550 — Investment Income and Expenses

Special rules apply to the sale or trade of property between related parties. Gain on Sale or Trade of Depreciable Property

Your gain from the sale or trade of property to a related party may be ordinary income, rather than capital gain, if the property can be depreciated by the party receiving it. See chapter 2 in Pub. 544 for more information. Like-Kind Exchanges Generally, if you trade business or investment real property for other business or investment real property of a like-kind, no gain or loss is recognized. See Like-Kind Exchanges under Nontaxable Trades, earlier. This rule also applies to trades of real property between related parties, defined next under Losses on Sales or Trades of Property. However, if either you or the related party disposes of the like-kind property within 2 years after the trade, you both must report any gain or loss not recognized on the original trade on your return for the year in which the later disposition occurs.

This rule generally does not apply to:

• Dispositions due to the death of either related party,

• Involuntary conversions (see chapter 1 of Pub. 544), or

• Trades and later dispositions whose main purpose is not the avoidance of federal income tax.

If a property holder's risk of loss on the property is substantially diminished during any period, that period is not counted in determining whether the property was disposed of within 2 years. The property holder's risk of loss is substantially diminished by:

• The holding of a put on the property,

• The holding by another person of a right to acquire the property, or

• A short sale or any other transaction.

Losses on Sales or Trades of Property You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties.

• Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

• A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.

• A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock (see Constructive ownership of stock, later).

• A tax-exempt charitable or educational organization directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. In addition, a loss on the sale or trade of property is not deductible if the transaction is directly or indirectly between the following related parties.

• A grantor and fiduciary, or the fiduciary and beneficiary, of any trust.