Sale of residence on land contract that is subsequently taken back

[LCP]

Can you imagine any scenario in which a loss might be generated that can be recognized? Losses on personal residences are not allowed but what about the "loss" on the land contract? What if the land contract had been inherited and was simply an investment in the mind of the heirs?

[Koss]

Land Contract

If they never occupied the residence as their main home, then I think you have a pretty strong case that it was held as an investment.

But let's back up a minute here...

Did they inherit the house or the land contract?

I guess they inherited both. With a land contract, title to the property remains in the name of the seller. At the time the land contract is executed, the seller does not execute a deed. Through the contract, the buyers acquire an equitable ownership interest, even though they do not hold legal title.

So your client inherited the house subject to the terms of the land contract. Almost like inheriting a house that has an outstanding mortgage loan, but the other way around.

This is all very interesting, but it may not be very important. If the house was never their principal residence, then they should be able to deduct a loss.

Did they subsequently sell the house? Or do they now own it, without the encumbrance of the land contract? Are they now living in the house?

If the buyer defaults on a land contract, and the seller takes the house back, that comes under the rules for foreclosure and repossession. Well, maybe. Did they recover full ownership of the house through a judicial proceeding? Or did they agree to cancel the land contract by negotiating with the buyers? The latter might not be considered a foreclosure/repossession.

Determining their basis is probably going to get really complicated, really fast.

BMK

[Koss]

Capital Loss

Even if they are now occupying the house as their principal residence, they may nevertheless have a deductible loss, because at the time the loss was realized, the house was not their principal residence.

That sounds great on a theoretical level. But if they took the house back from the land contract, and they haven't sold it, then I'm not sure they have realized a loss.

Need more details. See my previous remarks.

BMK

[ddoshan]

investment in the mind of the heirs?

Not sure about that tact

[Koss]

Investment?

investment in the mind of the heirs?

Not sure about that tact

For the sake of argument, let's take the land contract out of the equation for a minute.

Suppose my mother died on February 1, 2012. I inherit her house, through her estate, because her will says that I get the house. The house has no mortgage.

Suppose further that I never lived in the house.

So as of February 1, I am the owner of the house. I never occupy it as my principal residence, nor do I use it as a second home. I never offer it for rent, either.

On February 23, I put the house up for sale by listing it with a real estate agent.

Then the house sits on the market for a year and a half before it is sold.

My basis is the FMV on the date of death.

If the house is sold for less than the basis, I think there is a deductible capital loss. This is not a loss on my principal residence.

Whether I think of it as an investment is irrelevant. It is a capital asset, and I don't see any reason that a loss would not be deductible.

Put another way, I don't see how this is any different from selling inherited stock.

BMK

[ddoshan]

There would not seem to be any problem with that. Trouble is I don't know if I have ever had a client that did any kind of analysis or had a legitimate appraisal done at the time of death to determine the FMV. And not just some real estate agent maybe telling them that the property is worth so much or sets some unrealistic value on it, lists it, and it sits on the market for a long time before selling for much less than the listed price.

Was there really a loss or was the house just plain overpriced in the first place. I suspect the latter.

[Burke]

Most people use the assessed value for real estate tax purposes. This is recorded with the locality who does the assessments.