Section 267 Explained: Related-Party Loss Disallowance and the Matching Rule

Imagine this: you bought a rental condo a decade ago for $400,000. The market softened, and today it's worth $280,000. You'd love to sell it, lock in the $120,000 capital loss, and use that loss against your other gains. To keep the property in the family, you sell it to your sister at fair market value. Clean transaction, arm's-length price, paperwork signed.

Then your accountant calls and tells you the $120,000 loss is gone. Not deferred. Not delayed. Gone — as far as you are concerned.

Welcome to Section 267 of the Internal Revenue Code, the quiet rule that disallows losses on sales between related parties and re-times deductions when a related buyer and seller use different accounting methods. It's one of the most under-appreciated landmines in tax law for family-owned businesses, brother-sister corporations, and partnerships where the owners share a dinner table or a cap table.

This guide walks through what Section 267 actually does, who counts as a "related party" (including the constructive ownership rules that catch people off guard), how the buyer can later use the disallowed loss as a future offset, and the matching rule that defers deductions for accrued-but-unpaid expenses. By the end, you'll know when to restructure a transaction, when to keep careful records, and when to call a tax adviser before signing anything.

The Two Rules Inside Section 267

Section 267 contains two distinct operating rules. Conflating them is the most common source of confusion.

Rule one — Section 267(a)(1): Loss disallowance. No deduction is allowed for any loss from the sale or exchange of property, directly or indirectly, between related persons.

Rule two — Section 267(a)(2): The matching rule. If an accrual-basis taxpayer owes a deductible amount (interest, rent, salary, management fees) to a related cash-basis payee, the payor cannot deduct the amount until the payee actually includes it in income.

Both rules are aimed at the same underlying mischief — moving deductions and income between related taxpayers to game tax timing — but they apply to completely different fact patterns. Mix them up and you'll either lose deductions you were entitled to or claim ones you weren't.

Rule One: Losses on Sales Between Related Parties

Start with the loss rule because it's the more punishing of the two.

What gets disallowed

Any loss from a "sale or exchange" of property between related persons is disallowed at the seller's level. The seller does not get to use the loss against other capital gains, against ordinary income (in the limited cases where that would be possible), or carry it forward as a capital loss carryover the way an ordinary disallowed loss might work.

Critically, "indirectly" counts too. Routing the sale through an unrelated intermediary who flips the property a week later to your sister will not save the deduction.

Two important exceptions

Complete liquidations. Losses on distributions in complete liquidation between a distributing corporation and its distributee can still flow through under their own rules. Section 267(a)(1) explicitly carves this out.
Wash sales. Losses already disallowed by the wash sale rules (Section 1091) don't get a second shot at offset under Section 267(d).

The Section 267(d) gain offset — your "transferred loss"

Here's the part that even experienced filers miss. The seller permanently loses the deduction, but the buyer gets a partial backstop. When the related-party buyer later disposes of the property at a gain, the buyer's gain is recognized only to the extent it exceeds the previously disallowed loss.

Back to the condo example. Your sister bought it from you for $280,000. Five years later, she sells it to a stranger for $360,000.

Her realized gain looks like $80,000.
But $120,000 of disallowed loss is sitting in the property.
Her recognized gain is $0. The other $40,000 of disallowed loss simply evaporates — it cannot create a loss for her.

This is the offset, not a step-up. It only neutralizes gain. If the eventual sale is for less than her basis, she gets no extra benefit. If she sells at a gain bigger than the disallowed loss, she pays tax on the excess.

The practical implication: when a related-party sale is unavoidable, document the seller's adjusted basis at the moment of transfer, the seller's holding period, and the disallowed loss amount. The buyer will need that file years later when she sells.

Who Counts as a Related Party

Section 267(b) lists thirteen categories of related persons. The ones that ensnare ordinary small-business filers most often are:

Family members — siblings (whole or half blood), spouse, ancestors, lineal descendants.
An individual and a corporation when the individual owns, directly or by attribution, more than 50% in value of the outstanding stock.
Brother-sister corporations when more than 50% of each corporation's stock is owned, by value, by the same persons.
A grantor and a fiduciary of a trust (and various trust/beneficiary pairings).
A corporation and a partnership when the same persons own more than 50% of both.
Two S corporations, or an S corporation and a C corporation, with more than 50% common ownership.
An executor of an estate and a beneficiary (with a narrow exception for satisfying a pecuniary bequest).

A few details that surprise filers:

The family group is narrower than you'd think. Aunts, uncles, cousins, nieces, nephews, in-laws, step-parents, and step-children are not "family members" for Section 267 purposes.
"More than 50%" is strictly greater than half. Exactly 50% is not enough.
The 50% test looks at value, not just voting power.

Constructive ownership: stock you don't actually hold

Section 267(c) layers constructive ownership on top of the actual ownership tests. You can become "related" to a corporation or partnership you don't directly own, simply because someone close to you does.

The four attribution paths:

Entity attribution. Stock held by a corporation, partnership, estate, or trust is attributed proportionately to its shareholders, partners, or beneficiaries.
Family attribution. You are deemed to own the stock held by your siblings, spouse, ancestors, and lineal descendants.
Partner attribution. An individual is treated as owning stock held by their partners in a partnership.
Re-attribution limit. Stock that you constructively own once can be re-attributed for further entity ownership, but family and partner attribution cannot stack on top of each other to manufacture new "owners."

The example that comes up over and over: you sell equipment at a loss to a C corporation that you do not own a single share of. Your spouse owns 60%. Section 267(c)(2) attributes that 60% to you. You are now an individual who "owns" more than 50% of the buyer. The loss is disallowed.

The same trap snaps shut on:

Sales between a partnership and a corporation where the same family group owns more than half of each.
Loans between brother-sister corporations whose common ownership runs through a parent's trust.
A sale by you to your adult child's wholly-owned LLC. Family attribution makes your child the constructive owner; child + LLC ownership puts the LLC in the related-party zone.

If a transaction sits anywhere near a family, a closely held corporation, or a controlled partnership, do the attribution math before signing the bill of sale, not after.

Rule Two: The Matching Rule for Accrued Payments

Section 267(a)(2) addresses a different timing game: an accrual-method payor deducts an expense in Year 1, while the related cash-method payee doesn't include the income until Year 2 — or never. The matching rule says: the payor's deduction is deferred until the payee actually picks up the income.

Classic fact patterns it catches

A C corporation accrues a $150,000 year-end bonus payable to its 100% shareholder-employee. The corporation wants the deduction in Year 1; the shareholder reports wages when paid. Unless paid within the statutory window, the corporation cannot deduct in Year 1.
A partnership accrues interest expense on a loan from a 60% partner. The partnership wants the current deduction; the partner reports interest when received in cash.
A controlled corporation accrues rent payable to its owner-landlord on a related-party lease.

The 2½-month safe harbor

There is a practical out. If an accrued amount is actually paid within 2½ months after the close of the payor's tax year, the matching rule generally does not freeze the deduction. The pattern most closely held businesses follow:

Accrue year-end bonuses, rent, interest, and management fees by December 31.
Cut and clear the checks by March 15.
Document the payment date.

Miss the window and the deduction slides into the year the related payee actually picks up the income — which often produces a permanent rate mismatch and an unhappy K-1 conversation.

Where the matching rule does not apply

Guaranteed payments to partners under Section 707(c) are not deferred by Section 267(a)(2). They have their own rules.
Sales of inventory between members of a controlled group in the ordinary course of business have specific carve-outs, especially in cross-border contexts.
Certain low-income housing exceptions exist for qualified partnerships with small minority partners.

Section 267A — a different but related provision added in 2017 — addresses payments to hybrid entities and hybrid transactions, and is its own world. If you have cross-border related-party debt, that's a conversation for a specialist.

Common Mistakes That Trigger Section 267

Five mistakes show up repeatedly when these rules cause problems on audit:

Assuming "I don't own it" defeats the rule. Constructive ownership attributes stock through your spouse, children, parents, siblings, trusts you set up, and entities you partly own. The buyer of your loss-asset doesn't need to be on your own tax return for Section 267 to apply.
Reporting the disallowed loss anyway. Filers sometimes claim the loss on Form 8949 or Form 4797, hoping it will go through. It might in the short term, but on audit the deduction is reversed and the buyer's gain offset is also at risk because no one tracked it.
Forgetting to give the buyer a basis memo. The disallowed loss only helps the buyer if the buyer knows it exists when they later sell. Five or ten years later, that file is the difference between paying tax on a phantom gain and reporting zero.
Treating the 2½-month bonus rule as automatic. The rule requires actual payment, not just a journal entry that "accrues" the bonus into another payable account. The IRS regularly disallows accrued compensation deductions when the check is dated April or later.
Ignoring the related-party loan documentation trail. Interest accrued on shareholder or partner loans is the single most common Section 267(a)(2) deferral. Document the rate, terms, and actual cash payment dates.

How Good Bookkeeping Defuses the Trap

Section 267 looks scary on the page, but most of the pain is administrative. The rule rewards filers who can prove, in a clean ledger, who owned what, when payments cleared, and what basis facts traveled with the property.

A few habits that pay for themselves:

Tag related parties in your chart of accounts. Create distinct general-ledger accounts for related-party loans, related-party rent, and related-party compensation. When year-end planning starts, you can find every Section 267 exposure in one query.
Keep a "disallowed loss register." Every time a related-party sale produces a disallowed loss, log the property identifier, the seller's adjusted basis, the sale price, the disallowed amount, the buyer, and the buyer's new basis. When the buyer eventually sells, that register turns into a clean Section 267(d) offset.
Reconcile accrued related-party expenses monthly. It's harder to forget the 2½-month payment window when an aging report sits in front of you. A line item that was supposed to clear in February but is still on the books in May is a deduction quietly slipping into next year.
Tie payment dates to bank evidence, not just journal entries. "Paid" for Section 267 purposes means money has actually moved — usually a cleared check, ACH, or wire. The bank statement is the audit-ready proof.

Plain-text accounting makes this kind of audit-defensible bookkeeping unusually easy. Because every transaction is a line in a readable file, version-controlled and human-auditable, you can search a decade of history with ordinary command-line tools and produce a basis memo or related-party schedule in minutes.

Restructuring to Stay Out of Section 267

If you control the timing and structure of a transaction, you have options before the loss is locked in:

Sell to a truly unrelated third party. A genuine arm's-length buyer outside the family group preserves the loss for the seller.
Wait until the relationship breaks. If the related-party status is about to change (divorce finalized, controlled-corporation ownership about to drop below the 50% threshold), the calendar can matter.
Use a fair-market-value sale-leaseback with an unrelated counterparty. Rather than transferring the property to a related entity, structure operating use through a lease from an outside party.
Re-examine whether the sale should happen at all. If the only reason you're selling is to harvest the loss, and the buyer is going to be related, there is often a better tax move (Section 1031 exchange where applicable, charitable contribution of appreciated property in offset planning, or simply holding).
For the accrued-expense pattern, write the check. A late-February payment is cheaper than a deferred deduction in 99% of cases.

When in doubt, model the transaction both ways — with the loss allowed and with it disallowed — before signing. The marginal-tax-rate cost of getting Section 267 wrong is usually larger than the cost of a one-hour consultation.

Quick Decision Checklist

Before you close any related-party transaction, walk this list:

Is the buyer related to me under Section 267(b)? Run the family list and the constructive ownership rules.
Will the transaction generate a loss? If yes, plan for disallowance under 267(a)(1) and document basis for the buyer's 267(d) offset.
Is the transaction an accrued expense from an accrual-basis payor to a cash-basis related payee? If yes, plan to pay within 2½ months.
Is the property covered by a special exception (complete liquidation, wash sale rule, low-income housing partnership)?
Are records in place so the disallowed loss can be tracked across years?

A green light on all five points is a sign the transaction is safe to proceed. A red flag on any one of them is the cue to slow down.

Keep Your Related-Party Records Audit-Ready From the Start

Whether you run a family-owned operating business, a small holding company, or a partnership where the partners happen to be relatives, the difference between a Section 267 surprise and a clean filing is almost always the quality of your books. Beancount.io gives you plain-text, version-controlled accounting where every related-party loan, lease, accrual, and basis adjustment lives in a readable file you can audit, search, and trust. Start free and see why developers and finance professionals lean on plain-text accounting to make rules like Section 267 less scary and more manageable.