Inherited House - Loss on Sale, but...

[JohnH]

Taxpayer and her sister inherited their parents' home when they died. Taxpayer & spouse moved into the home and lived there 3 years. No rent or consideration was paid to the other sister. Then the taxpayer & spouse moved out and they sold the house at a $20K loss, splitting the proceeds from the sale equally. I know the taxpayer can't claim any loss on her return because it was her personal residence, but can the sister who never lived there claim her half of the loss?

[Gary2]

Taxpayer and her sister inherited their parents' home when they died. Taxpayer & spouse moved into the home and lived there 3 years. No rent or consideration was paid to the other sister. Then the taxpayer & spouse moved out and they sold the house at a $20K loss, splitting the proceeds from the sale equally. I know the taxpayer can't claim any loss on her return because it was her personal residence, but can the sister who never lived there claim her half of the loss?

No, because allowing the first sister to live there with no consideration means it was personal use for both of them.

[JohnH]

Ouch!.......

[S T]

Thanks for this timely post, as I just had received a phone call on a similar situation. 3 Beneficiaries, and one lived in the property

So much for a loss on sale - what about the expenses on cost of sale (still an expense on the Actual Sale) and repairs getting ready for sale - can those be used or not??

Sandy

[Gary2]

Those can be used to reduce proceeds or increase basis, which just gets you a larger unusable personal loss.

But do watch out for any deductions from proceeds to cover real estate taxes (or anything else that would normally be deductible). These are easy to overlook on the HUD-1.

[S T]

True enough, but cost of sale expenses on Hud-1 can reduce gain (FMV DOD etc less Sales Expenses) - yes I am aware of the property tax pro-rate - just wasn't sure about repairs, maintenance while one of the beneficiaries was living in the property, and if those can also be used to reduce any gain on the sale - reflected on the 1041, as expenses.

Sandy

[veritas]

Another scenario

Home is inherited and the market is down. The beneficiaries believe that they can hold onto the home and sell it at a nice profit. One couple moves in and uses it as their residence with the understanding that all expenses are to be maintained by them and to keep the home in good order.

They wait three years and the market doesn't come back so they sell at a loss.

What now?

[mactoolsix]

Home is inherited and the market is down. The beneficiaries believe that they can hold onto the home and sell it at a nice profit. One couple moves in and uses it as their residence with the understanding that all expenses are to be maintained by them and to keep the home in good order.

They wait three years and the market doesn't come back so they sell at a loss.

What now?

They must pay Fair Market Value rent or it will be considered personal use. The payment of all expenses and maintenance, probably doesn't meet the FMV rent, thus they have converted the property to personal use.

[S T]

Another scenario unlike Veritas example of 3 years, takes approx 18 months, , one of the beneficiaries lives in the home, pays no FMV, Trust pays the mortgage interest, prop tax, repairs and maintenance, getting ready for sale, then property is sold.

Due to the beneficiary living in property, Trust can or cannot deduct the mortgage interest, prop tax, repairs, etc?

Would it be possible to charge the beneficiary that lived in the property FMV rent from their share of beneficiary distribution when the house is sold (as this is the only asset) in the Trust.? Then that would qualify some of the Trust costs as an expense? Of course I guess we have to report the FMV rent, then deduct the expenses -

Sandy

[mactoolsix]

Another scenario unlike Veritas example of 3 years, takes approx 18 months, , one of the beneficiaries lives in the home, pays no FMV, Trust pays the mortgage interest, prop tax, repairs and maintenance, getting ready for sale, then property is sold.

Due to the beneficiary living in property, Trust can or cannot deduct the mortgage interest, prop tax, repairs, etc?

Would it be possible to charge the beneficiary that lived in the property FMV rent from their share of beneficiary distribution when the house is sold (as this is the only asset) in the Trust.? Then that would qualify some of the Trust costs as an expense? Of course I guess we have to report the FMV rent, then deduct the expenses -

Sandy

Similar to an individual, the trust can deduct the mortgage interest and taxes it paid (assuming it is the responsible owner). No repairs.
However, since there was no FMV rent paid for 18 months, no deposits in a bank account showing such, and rental income was not on the previous years return???, don't you think this would be a red flag? Are you thinking of amending last years return to show rental income that wasn't really received?

Tell the client to check with their tax preparer in the future prior to making (or not making) financial arrangements that could affect their taxes.

Just my 2 cents,
Mike

[JohnH]

So if the taxpayer loses the ability to claim a loss on the sale of the inherited property due to conversion to personal use, how is it to be reported on the tax return? It appears to me that the selling price and cost basis are entered in columns (d) and (e) of Form 8949, then the loss amount is entered in column (g). The only code I can find for column (f) woiuld be "L". Is that correct?

[mactoolsix]

So if the taxpayer loses the ability to claim a loss on the sale of the inherited property due to conversion to personal use, how is it to be reported on the tax return? It appears to me that the selling price and cost basis are entered in columns (d) and (e) of Form 8949, then the loss amount is entered in column (g). The only code I can find for column (f) would be "L". Is that correct?

That is correct - your software may have a check box to "require reporting on Sch. D." Otherwise since it is a non-deductible loss, it may not print or transmit the Sch. D.

Here is a list of the codes: http://www.irs.gov/pub/irs-pdf/i8949.pdf page 5-6

[FEDUKE404]

Plan B

Unless facts can prove otherwise (the property was truly a rental/business property, or the property was somehow investment property) my initial position would be this disposition was one of a personal asset resulting in a non-deductible loss.

Regardless of any Form 8949 issues, why would there be a need for any Form D/Form 8949 to be prepared in the first place??

Granted, if somehow a Form 1099-B or even Form 1099-S appeared on the horizon, a more creative approach would likely become necessary. But the end result would still be the same.

For my personal 2¢ worth, those who apparently are trying to turn the history of this house into a rental scenario are fighting a losing war.

FE

[mactoolsix]

Regardless of any Form 8949 issues, why would there be a need for any Form D/Form 8949 to be prepared in the first place??

FE

Purely for documentation. Once three years has passed, no worries about an IRS challenge. Why not put it simply "put it to bed." Similar to why file a tax return if you don't actually meet the taxable income thresholds?

[JohnH]

Unless facts can prove otherwise (the property was truly a rental/business property, or the property was somehow investment property) my initial position would be this disposition was one of a personal asset resulting in a non-deductible loss.

Regardless of any Form 8949 issues, why would there be a need for any Form D/Form 8949 to be prepared in the first place??

Granted, if somehow a Form 1099-B or even Form 1099-S appeared on the horizon, a more creative approach would likely become necessary. But the end result would still be the same.

For my personal 2¢ worth, those who apparently are trying to turn the history of this house into a rental scenario are fighting a losing war.

FE

I should have mentioned in the original post but failed to do so. Both the taxpayer and the sister each received a 1099-S for half the selling price of the house. So in order to head off a CP2000 in a couple of years, we had to do the basis calculation knowing that it would yield no tax benefit. I'm leaving it to the client to explain everything to the sister....