Can You Deduct a Loss on Selling Property to a Family Member or Your Own Company? NIRC Section 36(B)
No. Under NIRC Section 36(B), a loss from selling or exchanging property is not deductible when the buyer is a member of your family or a corporation in which you own more than 50% in value of the outstanding stock. The rule applies “directly or indirectly,” so routing a sale through an intermediary does not restore the deduction. Gains on the same sales remain taxable.
Get Your Filing Workflow in Order FREE →What does NIRC Section 36(B) prohibit? #
NIRC Section 36(B) denies the deduction of losses from sales or exchanges of property between listed related parties. The Code gives six categories; the first two matter most for small businesses and families. The operative text states:
“(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly - (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; …”
— Section 36(B)(1)–(2), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil.
Who counts as “family” for this rule? #
The Code says the family “shall include only” brothers and sisters (full or half-blood), spouse, ancestors, and lineal descendants. “Only” matters: cousins, uncles, aunts, nephews, and in-laws are not on the list. A sale of property at a loss to one of them is not barred by Section 36(B)(1) on its face, although the sale must still be genuine and priced at a fair value to hold up in an audit.
How does the more-than-50% corporation test work? #
Section 36(B)(2) disallows the loss when an individual sells to, or buys from, a corporation and that individual owns, directly or indirectly, more than 50% in value of the corporation’s outstanding stock. Exactly 50% does not trigger the bar, because the text says “more than fifty percent.” Distributions in liquidation are excluded. Sections 36(B)(3) to (6) extend similar rules to personal holding companies and certain trusts.
Worked example: three sales at a loss #
Mario Cruz sold three assets during the year. All figures are fictional.
| Sale | Book value (₱) | Price (₱) | Loss (₱) | Deductible? |
|---|---|---|---|---|
| Delivery van sold to his sister | 400,000 | 250,000 | 150,000 | No: sister is within Section 36(B)(1) |
| Equipment sold to Cruz Trading Corp., in which he owns 60% | 300,000 | 200,000 | 100,000 | No: more than 50% under Section 36(B)(2) |
| Generator sold to his cousin | 120,000 | 80,000 | 40,000 | Not barred by Section 36(B); must still be a bona fide sale at fair value |
If Mario owned exactly 50% of Cruz Trading Corp., the second loss would not be barred by Section 36(B)(2). Of the ₱290,000 total loss, ₱250,000 is non-deductible and ₱40,000 remains potentially deductible.
Does this rule affect bad debts too? #
Yes. The bad-debt provision in NIRC Section 34(E)(1) excludes “those sustained in a transaction entered into between parties mentioned under Section 36 (B).” A receivable from a controlled corporation or a sibling that turns worthless is therefore not deductible as a bad debt either. See When Can You Deduct Bad Debts From Business Income? for the full requirements.
Practical steps before selling to a related party #
- Check the relationship against the list in Section 36(B)(1) and compute ownership percentage in value, including indirect holdings.
- If a loss is expected, expect no deduction and exclude it from the itemized schedule.
- Document the sale price and basis anyway; the gain side stays taxable. See Basis of Property for Gain or Loss.
- Where related-party dealings involve pricing between companies, review Who Must File BIR Form 1709.
Summary #
NIRC Section 36(B) disallows losses on sales between family members (siblings, spouse, ancestors, lineal descendants) and between an individual and a corporation more than 50% owned by that individual. Cousins and in-laws are outside the list. The same related-party concept blocks bad-debt deductions. The quoted text comes from RA 8424 as posted by LawPhil; verify against the current consolidated Code for a specific return.
Frequently asked questions #
Can I deduct a loss when I sell business property to my spouse or sibling? #
No. NIRC Section 36(B)(1) disallows losses from sales or exchanges of property between members of a family, which it defines to include brothers and sisters, spouse, ancestors, and lineal descendants.
Are cousins and in-laws treated as family under Section 36(B)? #
No. The Code says the family of an individual “shall include only” brothers and sisters, spouse, ancestors, and lineal descendants. A loss on a sale to a cousin or in-law is not barred by Section 36(B)(1), though the sale still needs to be genuine and at fair value.
What ownership level triggers the corporation rule? #
More than 50% in value of the outstanding stock, owned directly or indirectly by or for the individual. Ownership of exactly 50% does not trigger NIRC Section 36(B)(2) because the text requires more than fifty percent.
Is the gain on a related-party sale still taxable? #
Yes. Section 36(B) disallows only the loss. If a related-party sale produces a gain, the gain is computed and taxed under the usual rules.
Does Section 36(B) also block a bad-debt deduction owed by a related party? #
Yes. NIRC Section 34(E)(1) excludes debts sustained in a transaction between the parties mentioned under Section 36(B), so a worthless receivable from a controlled corporation or a sibling is not deductible.