Sale of Home - 50% Inherited

[death&taxes]

Client bought home with uncle in 1980. Client lived in home until 1997 with uncle. Uncle only occupant 1997 until death in 2007. Home sat empty and for sale since uncle's death. Sold early 2010. So basis computed using 50% of original basis and improvements plus the other 50% as valued on the inheritance tax form plus sales expense and a few improvements since client was sole owner. I have a small loss of about 3500.

I know inherited homes, not occupied by client at time of inheritance, - sold at a loss - the loss can be deducted as an investment property loss rather than a non-deductible sale of a personal asset.

I was thinking of deducting the entire loss but - it was a former personal residence of client in the early years. So then I thought about only deducting 50% showing 1/2 of sale as investment loss and the other as non-deductible personal loss.

Thoughts?

[ChEAr$]

Client bought home with uncle in 1980. Client lived in home until 1997 with uncle. Uncle only occupant 1997 until death in 2007. Home sat empty and for sale since uncle's death. Sold early 2010. So basis computed using 50% of original basis and improvements plus the other 50% as valued on the inheritance tax form plus sales expense and a few improvements since client was sole owner. I have a small loss of about 3500.

I know inherited homes, not occupied by client at time of inheritance, - sold at a loss - the loss can be deducted as an investment property loss rather than a non-deductible sale of a personal asset.

I was thinking of deducting the entire loss but - it was a former personal residence of client in the early years. So then I thought about only deducting 50% showing 1/2 of sale as investment loss and the other as non-deductible personal loss.

Thoughts?

Your last scenario makes a whole lot of sense and appears to be the only logical way to report the sale, that of two undivided interests.

[Burke]

Yup, I agree with the 50% rule too. He met the 3 out of last 5 yr rule for the exclusion under 121 for his half?

[Gary2]

I was thinking of deducting the entire loss but - it was a former personal residence of client in the early years. So then I thought about only deducting 50% showing 1/2 of sale as investment loss and the other as non-deductible personal loss.

I'm assuming this wasn't a duplex with separate apartments. What you're saying is that he bought half a share in the house, along with his uncle buying the other half, for him to use as a personal residence. When he moved out, he continued to think of his one-half ownership as personal use. He may have deducted his share of interest as a second home, maybe kept belongings there, etc. He didn't sell his half to his uncle for whatever reason, and if his title in the property permitted him to sell his share to a stranger, he nevertheless wouldn't have been interested in third-party offers for his share.

But when his uncle passed away and he inherited the rest of the house, he suddenly decided that the other half interest was a good investment, and he would treat it as such. Which half of the house was personal use and which was investment? Why would only half the house be a good investment?

The problem is that the rule allowing you to take a loss on the sale of inherited real estate is based on the premise that in the absence of any personal use (other than incidental to maintenance or sale), the sole motivation for accepting the bequest is to make money on the sale. But in this case, I don't see any way that you could argue that he kept his original half just for personal use but accepted the remaining half for investment reasons. If he had any personal use of the property at all - say leaving a box of clothes in the attic - you can't say that his right to leave that box there came only from his original deed and not the new deed.

The best you could do is to argue that when he moved out, he moved out lock, stock and barrel, stopped taking the mortgage interest deduction, and started treating his share as strictly an investment. Even though this produces a more beneficial result, it seems like a sounder argument - if all the requirements are met.

But more likely, the entire loss is personal. For a $1750 capital loss, I wouldn't waste time trying to justify it.