Sale of inherited residential real property

[Dale Watkins]

It appears that if there is a loss on the sale (using the Dec 2009 appraisal date for cost) that it is not deductible ($39000); form 4797 will show 0 and Sched D will not be used. Correct? Thank you.

Used as rental property Dec 2009-March 2012.

[David1980]

It might be. Assuming they sold in 2011 and received property in 2009, what did they do with it between?

[Gary2]

What makes you think a loss on rental property isn't deductible?

[Burke]

It is definitely deductible. Why is it coming up zero on 4797? Did you factor in the depreciation?

[Roland Slugg]

Used as rental property Dec 2009-March 2012.

Since the property was used as rental property, the loss is definitely deductible. That loss should flow from F-4797 directly to F-1040, bypassing Schedule D.

... using the Dec 2009 appraisal date for cost.

Not necessarily. The property's initial basis in the hands of the beneficiary is its FMV on the decedent's DOD (or six months later if an estate tax return was filed and the alternative valuation date was elected). However, if the residence was used for personal purposes for a period of time between the DOD and when it started being used as rental property, then the basis for figuring gain or loss, as well as depreciation, should be the property's FMV as of the date converted to rental use if that later FMV was lower than the DOD FMV. This means you may need two appraisal values. (In most cases a qualified appraiser should be able to do a forensic appraisal.)

Since the sale took place in 2012, I'm wondering why you are dealing with this now, and I'm guessing that you're doing tax planning for a client using either 2011 software or 2012 planning/pro-forma screens. In any case, if your software is not sending the loss to F-1040, it may be that you have not indicated that there has been a complete disposition of that passive activity in a fully taxable transaction. If so, the loss may be going to F-8582 and none of it flowing from there to F-4797 or F-1040 due to the PAL limitations. There may also be a current year rental loss as well as prior year unallowed rental losses that get released and allowed in full because of this sale.