Selling Business Equipment to a Family Member? The Section 267 Loss Trap

Published: August 24, 2026 · Reading time: 9 min

TL;DR: Selling business equipment to your spouse, sibling, parent, or child at a loss doesn't just shrink your deduction — under IRC §267(a)(1), it eliminates it completely. There's no partial allowance and no carryforward for you; the loss simply disappears the moment the sale closes. §267(c)(4) defines "family" narrowly (spouse, siblings, ancestors, lineal descendants — not in-laws, aunts, uncles, or cousins), and the mirror-image gain rule, §1239, uses a completely different, much narrower definition that doesn't reach a direct sale to an individual family member at all. Form 4797's instructions never mention any of this — the disallowance is silent and self-executing. In the worked example below, a $900 disallowed loss shrinks a later buyer's own taxable gain to $0, but $200 of it evaporates for good.

Downsizing a home studio, retiring a Schedule C business, or just handing an old laptop or camera to your kid instead of listing it on Marketplace — these moments come up constantly for freelancers, and the tax question rarely crosses anyone's mind until the return gets prepared. If the sale happens at a loss, that's a mistake. The Internal Revenue Code treats a related-party loss sale as inherently suspect, and the penalty for missing the rule isn't a smaller deduction — it's no deduction at all.

The Rule: §267(a)(1) Disallows the Loss Entirely, Not Partially

IRC §267(a)(1) states it in one uncompromising sentence:

"No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b)."

There's no percentage, no phase-in, no threshold below which it doesn't apply. If the buyer is a related person under §267(b), the loss is gone. This surprises people who assume tax rules against family transactions work like a haircut — maybe you lose half the deduction, or it gets deferred a few years. §267(a)(1) doesn't defer anything. It disallows the loss outright, permanently, for the seller.

It's Not a Haircut. It's Zero.

Compare this to related-party rules elsewhere in the Code that do work as a deferral — like-kind exchange gain deferral, or installment-sale rules that spread gain over time. §267 isn't one of those. The loss simply never existed for tax purposes. You still had the economic loss (you sold something for less than your basis in it), but the Code refuses to let that loss reduce your taxable income, full stop.

Form 4797 Won't Warn You

Form 4797, Sales of Business Property, is where a Schedule C freelancer reports the sale of depreciable business equipment. Its instructions contain no mention of "related party," "related person," or "section 267" anywhere in the form or its instructions. The disallowance is entirely self-executing under the statute — there's no checkbox that asks "was the buyer a family member?" and no worksheet that walks you through stripping the loss out. If you (or your tax software) simply enter the sale price and basis the way you would for a stranger, the loss flows straight through to your return, understated income and all, until an examiner who knows to ask the question finds it.

Who Counts as "Family" Under §267(c)(4) — and Who Doesn't

The related-person categories in §267(b) are long, but the one that catches almost every freelancer selling to a relative is §267(b)(1): "members of a family, as defined in subsection (c)(4)." That subsection is exact:

"The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants."

Covered

• Spouse
• Siblings — including half-siblings
• Ancestors — parents, grandparents, great-grandparents
• Lineal descendants — children, grandchildren, great-grandchildren

Not Covered (for a Direct Individual-to-Individual Sale)

• In-laws — a sale to your spouse's sibling or parent isn't reached by §267(c)(4) itself
• Aunts, uncles, nieces, nephews
• Cousins
• Step-relatives, unless they otherwise qualify as a lineal descendant or ancestor

This list is exact, not illustrative — the statute says "shall include only," which is drafting language for "and nothing else." A direct sale to your favorite cousin at a loss isn't automatically caught by this paragraph of §267(b), though it's worth noting that other categories in §267(b) can still sweep in a wider circle of relatives if the transaction runs through a trust, partnership, or corporation instead of a plain individual-to-individual sale.

Worked Example: The Camera System Sold to a Sister

A freelance photographer bought a camera system for $9,000 and has claimed $6,300 of depreciation on it, leaving an adjusted basis of $9,000 − $6,300 = $2,700.

Step 1 — Sale to Her Sister at a Loss

She sells the camera system to her sister for $1,800.

• Realized loss: $1,800 − $2,700 = −$900
• Her sister is "family" under §267(c)(4) (siblings are explicitly covered) → the entire $900 loss is disallowed under §267(a)(1)
• She reports $0 loss on Form 4797. The equipment simply comes off her depreciation schedule.

Step 2 — the Sister Later Resells to a Stranger

Two years later, the sister sells the same camera system to an unrelated buyer for $2,500.

• Her basis is what she actually paid: $1,800 (a plain cost basis — §267 doesn't step her basis up or down)
• Realized gain: $2,500 − $1,800 = $700
• §267(d) lets her reduce her recognized gain by the loss disallowed to her sister, but only up to the amount of her own gain: recognized gain = max($0, $700 − $900) = $0. Her entire $700 gain is sheltered.
• The remaining $200 of the original $900 disallowed loss ($900 − $700) is permanently lost — it doesn't carry forward, doesn't reduce any other gain, and doesn't benefit anyone.

The Flip Side: Selling at a Gain Is a Different, Narrower Rule

If the photographer had instead sold the same camera system to her sister for $3,600, the gain would be $3,600 − $2,700 = $900. It's natural to assume the same "related party" logic recasts that gain somehow — it doesn't, at least not here.

IRC §1239(a) recasts gain on depreciable property sold to a "related person" as ordinary income instead of the usually more favorable §1231 treatment. But §1239(b) defines "related person" for this purpose completely differently than §267(c)(4) does — three categories:

• A person and a controlled entity — defined by §1239(c) as a corporation more than 50% of whose value they own (directly or indirectly), or a partnership in which they hold more than 50% of the capital or profits interest
• A taxpayer and a trust in which the taxpayer or their spouse is a beneficiary
• An executor and a beneficiary of the same estate

None of §1239(b)'s categories reach a direct sale to a sibling, parent, or child as an individual. The photographer selling her camera to her sister at a $900 gain reports that gain the normal way — it isn't recast to ordinary income by §1239, because §1239 simply doesn't apply to that fact pattern. §1239 would bite only if she instead sold the camera to, say, an S-corp that she and her spouse own more than half of. The two related-party rules — one for losses, one for gains — use two different, non-parallel definitions of "related," and confusing them in either direction is easy to do.

How to Actually Report (or Not Report) the Sale

• The disallowed loss never reaches Form 4797's netting calculation. A loss on depreciable §1231 property normally belongs in Part I — don't enter the disallowed amount there. Remove the asset from your depreciation schedule showing the sale (the same asset list that feeds Form 4562's depreciation entries); the disallowed portion simply isn't reported as a loss anywhere on the return.
• Document the sale anyway. A bill of sale, the payment trail, and the fair market value you relied on all matter if the IRS questions whether the sale price was a genuine arm's-length figure rather than a disguised gift. This is worth doing even though no deduction is at stake, because a badly documented "sale" to a relative can also raise gift-tax questions if the price looks nominal.
• If you're the buyer, a separate trap applies: purchasing used business equipment from a related party generally disqualifies it from the Section 179 election and bonus depreciation, the same related-party rule working from the other side of the transaction. See CentSense's guide on used-equipment basis and records for a private-party purchase for that side of the mechanics.

Frequently Asked Questions

Can I deduct a loss from selling business equipment to my spouse, sibling, or child?

No. Under IRC §267(a)(1), any loss on a sale between related persons is entirely disallowed — not reduced, not deferred, zero. §267(c)(4) defines "family" for this rule as brothers and sisters (whole or half blood), your spouse, your ancestors (parents, grandparents), and your lineal descendants (children, grandchildren). If the buyer falls in that list, the loss simply cannot be claimed on Form 4797 or anywhere else.

Does selling to my brother-in-law or aunt trigger the same disallowance?

Not under this specific rule. §267(c)(4)'s family definition is narrow and exact: it names only siblings, spouse, ancestors, and lineal descendants. In-laws, aunts, uncles, nieces, nephews, and cousins are not on that list, so a direct sale to one of them isn't automatically caught by §267(a)(1), though other related-party categories can still apply if an entity or trust is involved.

If my loss is disallowed, is it gone forever?

Usually partly, not entirely. §267(d) lets the family member who bought the property use your disallowed loss to shelter their own gain if they later sell it (or property whose basis traces back to it) — but only up to the amount of their gain, and only on that specific property. If their eventual gain is smaller than your disallowed loss, the leftover amount is lost permanently; it never becomes a deductible loss for anyone.

If I sell equipment to a family member at a gain instead of a loss, is that gain also recast in some special way?

Only in narrower cases than the loss rule. §1239 turns a gain on depreciable property into ordinary income when sold to a "related person," but §1239(b) defines that term as controlled entities you own more than 50% of, certain trusts, and estates and their beneficiaries — it does not include a direct sale to a sibling, parent, or child the way §267's loss rule does. Equipment sold to your sister at a gain is taxed the normal way; the same equipment sold to an S-corp you and your spouse control would be hit by §1239.

Will my tax software or Form 4797 flag this automatically?

No. The IRS's Form 4797 instructions contain no mention of "related party," "related person," or section 267 — the disallowance is self-executing under the statute, with no line, checkbox, or worksheet on the form itself. If you don't know to strip the loss out before entering the sale, most software will happily deduct it, which is exactly the error this rule is designed to catch on audit.

Authoritative References

• 26 U.S.C. §267 — Losses, expenses, and interest with respect to transactions between related taxpayers
• 26 U.S.C. §1239 — Gain from sale of depreciable property between certain related taxpayers
• IRS — Instructions for Form 4797: Sales of Business Property
• IRS — Publication 544: Sales and Other Dispositions of Assets

Related reading: Used-equipment basis and records for a private-party purchase · Depreciation recapture for freelancers · Retiring or abandoning business assets · Single-member LLC and the disregarded-entity Schedule C

Keep Every Sale's Numbers Straight Before You File

Whether you're selling old equipment to a stranger or to your own sibling, the deduction question always comes back to the same two numbers: what you paid, and what depreciation you've already claimed. CentSense scans and categorizes every receipt automatically, so your basis records are ready the moment you need to figure out what a sale actually means for your return — related-party or not. Free tier includes 10 AI scans per month; Solo is $5/month for unlimited scanning and mileage logging.

Start free →

This guide is general education for U.S. freelancers and small-business owners covering the 2026 tax year. It is not personalized tax advice. Whether a specific sale falls within §267's related-party categories, and how much of any loss is recoverable later under §267(d), depends on facts a CPA or EA should review before you file.