Inheritance

[JON]

You get the loss

unless you used it as your residence.

[jainen]

converted to an "investment"

Jon, nobody is saying there isn't a loss if basis (FMV at date of death) exceeds net sales proceeds. The question in original post was about deducting such a loss.

There is more to that than just whether the house was used as a principal residence. The answer depends on whether it was business/investment property at the time of sale. Obviously it was not acquired for that purpose, and property held for a short period of time in a stable or declining market has not been converted to an "investment."

[JON]

Inherited property

is not a family home unless you live there. 706 requires date of death FMV which does not allow for selling costs. The loss is caused by definitions, but I believe to be deductable.

[Bees Knees]

I think you will have a loss by the beneficiaries often. Estate filed or not has to value the house at the FMV, closing costs can not be included. Goes to the beneficiaries when they sell they get the closing costs, which I would think could easily cause a loss...

I disagree.


Section 165(c) limits the deduction for a loss to three situations:

1) Losses incurred in a trade or business.
2) Losses incurred in any transaction entered into for profit, though not connected with a trade or business, and
3) Casualty and theft losses.

Number 1 and 3 above are irrelevant to our discussion. The issue has to do with number 2 above. Can an estate and/or beneficiary treat an inherited house as investment property with the idea of deducting a loss on it’s sale?

The IRS letter ruling said: “An estate may deduct a loss incurred in any transaction entered into for profit, though not connected with a trade or business. Section 165(c)(2). This provision may apply when the estate establishes that it converted the decedent's personal residence to an income-producing purpose. We believe that the conversion of the decedent's personal residence is not necessarily unusual, especially if the administration of the estate is prolonged. Nevertheless, since the loss is only appropriately deductible if the estate can prove that the property was converted to income producing property, estate returns should be examined on a case-by-case basis to determine whether the estate has converted the personal residence to rental property.”


It is clear the IRS is taking the stand that if you want to deduct a loss on the sale of an inherited personal residence, you have to first convert it to rental property, or hold it as investment property, for a period of time prior to selling it. Otherwise, the IRS will call it personal use property and not allow a loss on its sale.

You can fight that ruling in court if you disagree, but I think it is important that we advise our clients of the IRS position on this issue if they insist on deducting a loss.

[jainen]

nature of an investment

The nature of an investment is property held with the expectation of increased value due to outside market forces. The word "held" is why the IRS looks for a period of time in which market forces could have an effect. Otherwise it's just a family home, and a loss is not allowed.

[JON]

Disagree

I think you will have a loss by the beneficiaries often. Estate filed or not has to value the house at the FMV, closing costs can not be included. Goes to the beneficiaries when they sell they get the closing costs, which I would think could easily cause a loss...

[Bees Knees]

You can read that IRS rulling at:

http://ftp.irs.gov/pub/irs-sca/1998-012.pdf

I think it is saying it has to be held for a period of time as investment property in order to claim a loss on the sale.

I'll play Devil's Advocate - the Office of Chief Counsel of the (then) Brookhaven Service Center issued a SCA 1998-012 in May, 1998 that concluded an estate may not deduct a loss on a decedent's personal residence. Presumably, this would apply to beneficiaries also.

Some practitioners who teach classes in estate income tax caution tax pros about the SCA - others don't.

New York Enrolled Agent

[Bird Legs]

Basis of Inherited Property

See TTB page 21-28.

[lsmith]

inheritance

Thanks to you both..Do you have a reference that I can look up?

[jimmcg]

Based on limited facts presented the general rule is stepped up basis upon inheritance. If property is not personal residence and market takes a dip and proceeds are less than basis then you have a loss.

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Property received by inheritance, I.E., house. Question: can a loss be taken on disposal?