sale of inherited house

[sdiazea]

TP has had her own home for years.
Mom died.
TP inherited mom's home and flipped it (in 3 months) at a loss. FMV (based on recent neighborhood sales) was greater than sale.
I'm looking for a way to take a Capital Loss but can't find a ruling. TP has never lived in the home and even though the inheritance might have made it her 2nd home, in actuality, it never was.

Any solution for me?
Thanks,
Sharon

[NewMexico]

Loss on sale of personal residence is not deductible. Only deductible if it was a rental property.

The loss on the sale of a personal residence is a nondeductible personal loss.

If TP inherited house at time of death the TP's basis is the stepped up basis (FMV) at time of death.

[BOB W]

Loss on sale of personal residence is not deductible. Only deductible if it was a rental property.

The loss on the sale of a personal residence is a nondeductible personal loss.

If TP inherited house at time of death the TP's basis is the stepped up basis (FMV) at time of death.

Why wouldn't the "inheritence" house be considered "Investment Property" ???????

[sdiazea]

Why wouldn't the "inheritence" house be considered "Investment Property" ???????

How can I justify that??

[sdiazea]

> The loss on the sale of a personal residence is a nondeductible personal loss. <

Your own personal residence. BUT, it was not the personal residence of the TP who has had her own personal residence for many years.

>If TP inherited house at time of death the TP's basis is the stepped up basis (FMV) at time of death.<

Right. That is understood.

[erchess]

This is ultimately a question of Character.

The Character of the house in Mom's hands was clearly personal property. But it seems to me that since the heir never lived in it, we could make the case that in her hands its Character became investment property. I know of no case or authority on point and I would want to talk to an expert before did this.

We all seem to agree that the heir is entitled to have her basis stepped to its fair market value on the Mother's date of death or alternate valuation date. However, the house changed hands very soon after that date, and the IRS would likely want to know why its FMV declined. I would certainly include this in my discussions with a high powered researcher.

All in all, I wonder if trying to claim a loss on the house is more trouble than it's worth.

[OldJack]

There is no loss to deduct.

Obviously the FMV on the date of death was what son sold the property for 3 months later. The old willing seller and willing buyer is fair market value and you would have a hard time convincing an IRS agent that the value changed significantly in 3 months.

[S T]

Cost of Sale

What about the real estate commissions and the cost of sale. Wouldn't they be allowed and more than likely produce a loss.

Would it not be true, that if a form 706 were filed, the property would be inventoried at FMV at DOD. Which then that amount would be used as the basis on the sale. You would then also include costs of sale. More than likely would produce a loss.

Sandy

[BOB W]

Here is.....

.... my opinion> When a house is inherited the beneficiary has the choice selling or holding on to the house. How long it is held, to me, is not relevant. The estate valuation rules say "get an appraisal". Should several appraisals be done, Yes. But most get 1 and use a low ball figure for estate valuation> not considering the effect on the beneficiary.

In any case, that valuation is locked in according to IRS rules. If the property is held for a long period, inflation and market conditions move the price upwards. Upon sale, the closing costs get added to basis, thus reducing gain. I don't know of any valuation that takes into consideration the cost of selling.

Now, if the sale happens quickly after title was changed, does that mean those selling expenses are not basis adjustments?? I say yes and have reported those sales as losses.

Would or could the IRS say that the estate valuation was wrong, sure. That is why several appraisals should be done and you would pick the average of the appraisals. If that was done the IRS would have a hard time claiming an overvalued appraisal.

Especially in today's residential market, the reduction of FMV of a month or months ago can be dramatic. All it takes is an increase in mortgage lending rates. The facts are the facts and I take the loss.

[erchess]

Hmmmmmmm

I tend to agree with Bob. Even the firm with whom I started in the tax business would let me do as he suggests if evaluation had been done. I do however, have more or less two questions.

1. Was a formal appraisal done for estate purposes or did someone who is not a real estate professional simply look up a few contemporary selling prices of nearby and to them similar houses?

2. What were the conditions of the sale? Are there facts to substantiate the idea the the seller was not a willing seller or was under compulsion or lacked adequate knowledge of the pertinent tacts? Just as a for instance the home I live in now was bought by my Mom's Dad in 1933 at a fire sale price because the depression was on and the seller needed to pay the tuition bill for one of his children at the State University. My grandfather paid less than the assessed tax value of the property and he got more land than the owner wanted to sell because the seller was motivated and the depression had led to the absence of other buyers.

[dyne]

There is NO doubt about it, an inherited residence sold for a loss IS deductible as
a capital loss, provided it was NOT used for personal use after the death of the
decendent.

[sdiazea]

There is NO doubt about it, an inherited residence sold for a loss IS deductible as
a capital loss, provided it was NOT used for personal use after the death of the
decendent.

Thank you to all who have responded.
The complete info is this:
No professional appraisal was done. The Real Estate Broker - been in biz since 1987 - gave a professional "Opinion of Value" at $117,500 and listed it for $124,900. The Contract came in for $115,000 - $2,500 below the "Opinion of Value" . Settlement costs were $7,124,54.

So, am I understanding that you would take a loss of the settlement costs $7,124,54?

Sharon

[BOB W]

Due to ....

.... the shakey valuation, the FMV should be moved to the the selling price in this case. I would then deduct, as LTCG, the closing cost that relates to the selling of the house.

Be sure to include the legal fees, as many times the lawyer fees are not included on the closing statements. Also look for other expenses related to the sale outside the HUD statement.

[sdiazea]

.... the shakey valuation, the FMV should be moved to the the selling price in this case. I would then deduct, as LTCG, the closing cost that relates to the selling of the house.

Be sure to include the legal fees, as many times the lawyer fees are not included on the closing statements. Also look for other expenses related to the sale outside the HUD statement.

You've convinced me. So, this is on Sch D - basis is contracted price (not FMV) plus settlement costs. Selling price is contracted price - thus the settlement costs are the only loss allowed. Sounds reasonable to me.

Sharon

[Paul D]

Some answers

Hi. I am dealing with this same issue myself as my mother passed away one year ago and I sold her house in Fredericksburg, VA, several months later, in November 2006, after watching the market collapse under me.

You can find citations for this on the web, but one place to look is IRS publication 559, page 16. There is a paragraph entititled "Sale of Decedent's Residence" which says very clearly that it is okay to take the cap loss as long as the house was not used as a personal residence by the person who inherited it. That particular paragraph refers to form 1041, the estate income tax return, but the same logic is applicable to the 1040, I was told by my accountant.

In my case I got an official appraisal as of the date of death, which actually came in far higher than I expected it to. It's really not unusual in many areas of the country for prices to have fallen over the past year.

Paul D