Certain Nondeductible Losses

You can’t deduct a loss from a sale or exchange between certain related parties. This includes a direct or indirect sale or exchange of property between any of the following.

Members of a family.

A corporation and an individual who directly (or indirectly) owns more than 50% of the corporation’s stock (unless the loss is from a distribution in complete liquidation of a corporation).

A grantor and a fiduciary of a trust.

A fiduciary and a beneficiary of the same trust.

A fiduciary of a trust and a fiduciary (or beneficiary) of another trust if both trusts were created by the same grantor.

An executor of an estate and a beneficiary of that estate, unless the sale or exchange was to satisfy a pecuniary bequest (that is, a bequest of a sum of money).

An individual and a tax-exempt organization controlled directly (or indirectly) by the individual or the individual’s family.

See Pub. 544 for more details on sales and exchanges between related parties.

Report a transaction that results in a nondeductible loss in Part I or Part II of Form 8949 (depending on how long you held the property). Unless you received a Form 1099-B or Form 1099-DA for the sale or exchange, check box C or box I at the top of Part I or box F or box L at the top of Part II of Form 8949 (depending on how long you owned the property). Complete all columns. Because the loss isn’t deductible, enter “L” in column (f). Enter the amount of the nondeductible loss as a positive number in column (g). Complete column (h). See the Instructions for Form 8949, columns (f), (g), and (h).

Example 1.

You sold land you held as an investment for 5 years to your brother for $10,000. Your basis was $15,000. On Part II of Form 8949, check box F or box L at the top. Enter $10,000 on Form 8949, Part II, column (d). Enter $15,000 in column (e). Because the loss isn’t deductible, enter “L” in column (f) and $5,000 (the difference between $10,000 and $15,000) in column (g). In column (h), enter -0- ($10,000 − $15,000 + $5,000). If this is your only transaction on this Form 8949, enter $10,000 on Schedule D, line 10, column (d). Enter $15,000 in column (e) and $5,000 in column (g). In column (h), enter -0- ($10,000 − $15,000 + $5,000).

Example 2.

You received a Form 1099-B or Form 1099-DA. It shows proceeds (in box 1d on Form 1099-B or box 1f on Form 1099-DA) of $1,000 and basis (in box 1e on Form 1099-B or box 1g on Form 1099-DA) of $5.000. Box 7 on Form 1099-B or box 5 on Form 1099-DA is checked, indicating that your loss of $4,000 isn’t allowed.

If you received a Form 1099-B, on the top of Form 8949, check box A or box B in Part I or box D or box E in Part II (whichever applies). Enter $1,000 in column (d) and $5,000 in column (e). Because the loss isn’t deductible, enter “L” in column (f) and $4,000 (the difference between $1,000 and $5,000) in column (g). In column (h), enter -0- ($1,000 - $5,000 + $4,000).

If you received a Form 1099-DA, on the top of Form 8949, check box G or box H in Part I or box J or box K in Part II (whichever applies). Enter $1,000 in column (d) and $5,000 in column (e). Because the loss isn’t deductible, enter “L” in column (f) and $4,000 (the difference between $1,000 and $5,000) in column (g). In column (h), enter -0- ($1,000 - $5,000 + $4,000).

At-risk rules.

If you disposed of (a) an asset used in an activity to which the at-risk rules apply, or (b) any part of your interest in an activity to which the at-risk rules apply, and you have amounts in the activity for which you aren’t at risk, see the Instructions for Form 6198.

Passive activity rules.

If the loss is allowable under the at-risk rules, it may be subject to the passive activity rules. See Form 8582 and its instructions for details on reporting capital gains and losses from a passive activity.