Can a partner who owns a majority interest sell property at a loss to the partnership?

In the context of partnership taxation, the loss from the sale of property to the partnership by a partner who owns a majority interest is generally disallowed. This disallowance stems from the Internal Revenue Code provisions that prevent partners from recognizing losses on sales or transfers of property to their partnerships when they have a controlling interest in that partnership.

When a majority partner sells property to the partnership at a loss, it is seen as a transaction that lacks genuine economic loss from the perspective of the partnership's overall financial structure. The IRS holds that such transactions cannot generate tax-deductible losses because they do not create a real economic effect beyond the transfer of ownership within the partnership.

In contrast, if the partnership sells property to an unrelated third party, any resultant loss would typically be recognized since it reflects an arm's-length transaction. However, the regulations regarding related-party transactions — especially those involving majority interests — guard against cases where losses could unjustly benefit partners through tax deductions without a true change in economic circumstances.

Thus, a partner with a majority interest selling property at a loss to the partnership results in that loss being disallowed for tax purposes due to the prohibition on recognizing losses in transactions that do not significantly affect the partnership's overall financial outcome.