Final answer:
The correct statement for a related-party transaction where a loss is disallowed is that the related-party buyer's basis is reduced by the disallowed loss. This prevents the buyer from obtaining a tax advantage from the loss that the seller was not able to claim.
Step-by-step explanation:
Regarding a related-party transaction where a loss is disallowed, the correct statement is B) The related-party buyer's basis is reduced by the disallowed loss. What this means in practice is that if you sell an asset at a loss to a related party, such as a family member or a business you control, the Internal Revenue Service does not allow you to claim the loss on your tax return. Additionally, the basis of the buyer, the related party, must then be adjusted to essentially prevent that party from claiming a tax advantage from the disallowed loss when they subsequently dispose of the asset.
For example, if you sold a property to a sibling for $5,000 less than your original cost, that $5,000 loss is not deductible for you. The sibling's basis in the property would be the amount they paid minus the $5,000 loss you couldn't deduct. If the sibling later sells the property for a gain, this adjusted basis will affect the taxable amount of the gain.