Final answer:
When a taxpayer sells property to a related party, any loss resulting from the transaction is not recognized for tax purposes.
Step-by-step explanation:
When a taxpayer sells property to a related party, any loss resulting from the transaction is not recognized for tax purposes. This means that the taxpayer is not allowed to deduct the loss on their tax return.
The purpose of this rule is to prevent taxpayers from claiming artificial losses by selling property at a lower price to a related party and reducing their tax liability.
For example, let's say an individual sells a piece of real estate to their sibling at a significant loss. The IRS will not allow the individual to claim the loss on their tax return because the transaction is considered a related party sale.