Loans to Estate

[Corduroy Frog]

A deceased left a commercial building with a large mortgage to two children. There was a little cash which was tied up during the claim period.

During this period, these children loaned $10,000 ($5,000 apiece) to the operating fund. The estate operated at a loss, and the only cash available upon final distribution was $9400. So the building, the responsibility for the mortgage, and the $9400 was split 50/50.

One of these children is my client. He will receive a K-1 for half of the deductible loss operations, but the difference between $9400 and $10000 beneficiary loans will not be reported on the K-1.

My client loaned the estate $5000 and received $4700 back. Where can he deduct this $300 loss?? (if at all possible)

[Corduroy Frog]

Business Bad Debt?

No response, but I'll resurrect the post in hopes of getting one.

My thinking is that a $5000 loan to an estate by a beneficiary, who is ultimately repaid only $4700, may be entitled to a business bad debt. Only the well-known practice of disallowing a loss from a related taxpayer would stop it.

Any comments this time? Thanks, Frog.

[Bees Knees]

I haven't researched this, so I'm not going to commit to an answer, BUT, I think there is some missing information.

When you inherit stuff, you get FMV for a basis. That means all the improvements, liabilities of the property, loans, etc. get wiped out.

For example, you have a building worth $1 million, with a mortgage of $100,000. The kids don't want to lose it to the mortgage company, so since the estate doesn't have enough cash to make the mortgage payments, the kids kick in $10,000 during the time the estate holds the property. When the estate assets are distributed to the kids, there is no cash in the estate (the estate used the money from the kids to make the mortgage payments).

Do the kids have a loss because they didn't get their money back? I don't think so. The value of the building which now becomes their basis far exceeds any cash they lost making the mortgage payments.

[Davc]

When you inherit stuff, you get FMV for a basis. That means all the improvements, liabilities of the property, loans, etc. get wiped out.

Improvements are part of the FMV, Liabilities don't disappear unless somebody pays them. The net distribution is the FMV of the property - liabilities assumed - the loans. Basis is FMV.