I have a client that received a home from her deceased Mother. The Mother passed away 06/15/04. They sold the home in 07/15/05 for $82,300. Assuming an appreciation rate of 3% (which is probably real conservative in this area. Probably more like 1%) the value of the home at DOD was $79,703. With all the associated cost of sales (i.e. commissions, etc.) they will end up with a $9,412 loss. Do you think this seems right? Would you take the loss or just show $0 gain?
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There is no right answer to that. Technically, if the house was not used for any personal purposes after the DOD, it could be considered investment property to the beneficiaries, and thus would qualify for a loss.
On the other hand, if the house is not held for investment but sold as soon as possible after the DOD, the IRS could argue it was not really investment property but personal property, thus no loss deductible.
Or, the IRS could argue that the true market value of the property was its value on the DOD, minus normal costs to sell it and thus, basis for loss purposes equals the selling cost minus cost of sale...thus no gain or loss on the sale.
I would generally not advise trying to take a loss when an inherited house is sold, unless the house was held for investment after the DOD for a period of time before the decision was made to eventually sell it.
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