sale of inherited house

[George Boutwell]

Sale of Capital Asset

Under Section 1221, the house is clearly a capital asset, since it is property held by the taxpayer and it doesn't fit any of the specific items excluded from that category.

Loss on the sale of a capital asset is not deductible if it was held for personal use. However, there is no suggestion here that the house was used personally by the taxpayer who inherited it.

Even in a declining real estate market, FMV is what a willing buyer pays and a willing seller accepts. There is no suggestion that this was an arm-twisting transaction, not an arm's-length one.

So the issue in these situations usually boils down to whether the selling costs (including broker commissions) can be added to the basis in order to generate a loss. Those who are motivated by sentiment and fear -- "it just doesn't seem right, and IRS might audit my client" -- will avoid claiming such a loss. Those who are governed by statutes and regulations, will.

[lbbwest]

Sca 198-012

Office of Chief Counsel Internal Revenue Service Memorandum says that you CAN'T take a loss on the sale of a decedent's primary residence, but gee don't let that stop you.

[BOB W]

Office of Chief Counsel Internal Revenue Service Memorandum says that you CAN'T take a loss on the sale of a decedent's primary residence, but gee don't let that stop you.

We are talking about an inherited house, not the decedent's house. Decedent's house is sold by the estate, personal residence.

[lbbwest]

It doesn't matter.

Fair Market Value date of death is willing seller willing buyer. THAT is FMV not some realtor's guestimate. Can you put a loss on the return? Sure. Would it fly under examination. NO. If it was up for sale and then sold, that is FMV.

[BOB W]

Fair Market Value date of death is willing seller willing buyer. THAT is FMV not some realtor's guestimate. Can you put a loss on the return? Sure. Would it fly under examination. NO. If it was up for sale and then sold, that is FMV.

Are you forgeting the " cost of sale" expense?

[Gene V]

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

I'll go along with Paul on this one, remember MEMORANDUM are similar to Letter Rulings.
If the National Office renders advice favorable to the taxpayer, normally it must be applied. However, if the advise is against the taxpayer, the taxpayer does not lose his or her right to further pursue the issue in question with the IRS.

[GIMoe]

Fmv

Fair Market Value date of death is willing seller willing buyer. THAT is FMV not some realtor's guestimate. Can you put a loss on the return? Sure. Would it fly under examination. NO. If it was up for sale and then sold, that is FMV.

I wouldn't take a realtors guestimate but I would take a professional appraisor's written appraisal. If you have it professionally appraised at or near Date of Death, put it up for sale and it takes 6 months or more to sell, then what? The market has shown that it can change drastically in a 6 month time frame. FMV 6 months ago may not necessarily be FMV today.

Are you forgeting the " cost of sale" expense?

And let us not forget about the sales expenses.

[George Boutwell]

Office of Chief Counsel Internal Revenue Service Memorandum says that you CAN'T take a loss on the sale of a decedent's primary residence, but gee don't let that stop you.

Anyone who actually takes the time to read the Service Center Advice memorandum, which is directed to the Brookhaven Service Center and is based on the quirks of New York and New Jersey law, will not only not let it stop a taxpayer from claiming a loss, but will find it useful as authority for doing so.

As a result of the revisions to the New York and New Jersey
estate laws, only specifically devised real property is accorded under
the laws of these states the special treatment on which the above
regulation, rulings, and court case are based. Applying this
authority to the treatment of a loss on the sale of specifically
devised real property, an estate should report on Form 1041 only the
percentage of the loss recognized on the sale of the decedent's
specifically devised real property that equals the percentage of the
proceeds used by the estate to satisfy the estate's obligations. The
balance should be reported directly by the heirs or devisees. For
example, if fifty percent of the proceeds from the sale of the
decedent's personal residence are used to satisfy obligations of the
estate, the estate should report fifty percent of the loss recognized
on the sale and the heirs or devisees should report the remaining
fifty percent.. . .

. . .if the decedent’s will contains a mandatory direction to sell
the real property and distribute the proceeds, title to the real
property will not vest in the decedent’s devisees upon his death. New
York and New Jersey state law treats the real property as having been
converted into personalty as of the date of the testator’s death, such
that the property passes to the estate and not the devisees. See
Fidelity Union Trust Co. v. Green, 131 A. 208 (N.J. Super. Ct. Ch.
Div. 1925), and Deegan v. Deegan, 287 N.Y.S. 230 (N.Y. App. Div.
1936), discussing New Jersey and New York law respectively on this
subject. As a result of property passing to the estate and not the
heirs or devisees, the gain or loss realized on such sale should be
reported by the estate on Form 1041. See Brown v. Commissioner, 20
T.C. 73 (1953), acq. 1953-2 C.B. 3 (holding that the will of the
decedent did not equitably convert the decedent’s real property into
personalty which would have caused the title to the real property to
vest in the estate of the decedent so that the loss would have been a
loss of the estate rather than the loss of the residuary
beneficiaries).