Inherited Personal Residence-Sold at Loss. Deductible?

[zeros]

Client's father passed away and he inherited personal residence. From the time he inherited it to the time he sold it, it went down in value. Would this be a deductible loss? Would this be investment property?

[Snaggletooth]

Whose Residence

When you say it was a residence, was it the TAXPAYER's residence at the time of sale, or simply the residence of his deceased father??

Critical.

[zeros]

Father's Residence

He inherited his father's residence. He has his own home which he lives in.

[appelman]

Facts and circumstances

How long has he held the property since his father's death? What were his intentions regarding it?

[ChEAr$]

How long has he held the property since his father's death? What were his intentions regarding it?

Doesn't matter how long, for inherited real estate is long term by statute.

SO measure the deductible loss with reference to FMV on date of death. Don't forget to factor in sales fees etc.

[Kram BergGold]

You may have a loss

First, was the house appraised at or near the date of death?
Second, between the date of death was the house used by anyone other than a renter paying FMV rent?

If you answered yes to question 1 and no to question 2 you have a deductible loss.

If there was no appraisal, then the issue is, can you get an accurate one retroactivley?

If so again you have a loss.

[JohnH]

In North Carolina (and maybe in other states - I don't know), an initial inventory must be filed with the Clerk of Court listing all assets at FMV at the date of death. This inventory must also be updated every 90 days. It's a statement made under oath by the Executor/Executrix or Administrator. In the absence of an appraisal, would that filing with the Clerk of Court be an acceptable basis for establishing FMV?

[appelman]

I disagree, Harlan!

How long it was held after the inheritance does matter in terms of establishing intent and deciding whether it is to be treated as investment property or a second home. This is the only real issue here. As I see it, the clearest case for taking the loss would be if the beneficiary started trying to sell the property immediately after receiving it.

[ChEAr$]

not a matter of intent

I used the word "statutory" in my reply.

An inherited house is accorded long term capital gain treatment.

This should be covered in TheTaxBook (tm)

[appelman]

The issue is not whether it is long-term.

The issue is whether it has been converted to personal property in the hands of the beneficiary.

[FEDUKE404]

Not just personal

The issue is whether it has been converted to personal property in the hands of the beneficiary.

Or. more appropriately, the home sold is rightfully considered "investment" property due to the apparent presence of a potential tax loss.

[Gary2]

I used the word "statutory" in my reply.

An inherited house is accorded long term capital gain treatment.

This should be covered in TheTaxBook (tm)

I think people are talking at cross purposes.

Yet, the amount of time between death and sale is irrelevant to the long term versus short term capital gains question.

But when it comes to determine whether the estate or heirs were holding the property for personal or investment use, that's a fact and circumstances issue, with an element of intent, and the amount of time is one of the factors involved. If they held it for five years, in a decent real estate market, with no evidence of trying to rent it out or sell it earlier, and no other mitigating factors (like a suit over the will), it will be difficult to prove that there was no personal use in that period. But if they started looking for real estate agents as soon as the probate court approved executors, that's a pretty good argument that there was no personal use intent.

[ChEAr$]

I've never had a client who inherited parent(s)'s house who didn't jump at the chance to sell it as soon as possible.

Of course if the house had attained personal use property between and betwixt the time inherited and sold, loss would be
non deductible.

[Burke]

In North Carolina (and maybe in other states - I don't know), an initial inventory must be filed with the Clerk of Court listing all assets at FMV at the date of death. This inventory must also be updated every 90 days. It's a statement made under oath by the Executor/Executrix or Administrator. In the absence of an appraisal, would that filing with the Clerk of Court be an acceptable basis for establishing FMV?

Every state I have dealt with follows the same procedure, and in years past, the valuation on that was acceptable. The problem is, most will put down its city/county tax-assessed value which may not be realistic, especially if they only assess every 2-5 yrs. Right now, they are probably too high based on actual market sales. Then there is always the other side of the coin, regarding zoning and highest and best use. If it were a farmhouse and land for example which is in a developing area, and could be sub-divided even for residential use, the tax-assessed value will be way off (and too low). Those should be rare, however.

[JohnH]

I'm interested in this thread because I'm looking at a situation right now in which the home was inherited in 2010. The residence was listed on the inventory for the clerk of court at $160,000, and tax value at the time was only $121,000.

There was an 80% heir and 4 additional 5% heirs. The 80% heir bought out the 4 other heirs for $8,000 each (sale price based on $160,000). The buyout was handled through an attorney, with the property now deeded to the remaining heir and the $160,000 sale recorded in the tax records. None of the heirs ever lived in the house before or after the death of the decedent, and the buy out was done for the sole purpose of simplifying the process of disposing of the house.

About 3 months after the buyout, the remaining heir (owner) put the house on the market for $185,000 after investing about $10,000 to replace the HVAC system, refinish flooring, paint, & spruce the place up. It still hasn't sold in the intervening 2 years, and the asking price is now down to $150,000. Even if the home should sell at the full asking price, looks like they will have a $20,000 loss (plus closing costs for both the original purchase from the other heirs and any seller-paid closing costs on the final disposition).

All the above were the reasons I was asking about the advisability of using the inventory to establish FMV at the time the property was inherited.