Loss on sale of residence allowed?

[Roland Slugg]

In January 2008 a 93-yo woman moved out of her personal residence, into a nursing home, and in March 2008 put her residence up for sale. On April 28, 2008, a contract to sell her home was signed, and escrow was opened. The sales price was $282k, and an appraisal, done on May 14th by the buyer's lender, came in at the selling price ... $282k. Escrow closed on May 28, 2008. However, the seller died on May 24, 2008 ... four days before COE. Thus, at the time the house sold it was owned by the seller's estate ... not the deceased seller herself. The costs to sell the home (commissions, title, escrow, transfer taxes, etc) were $20k, so the net proceeds were $262k.

The basis of the house became $282k on the DOD. It was not used for personal purposes by the estate or the woman's eventual beneficiaries, but rather was "investment property" for the four day interval between DOD and COE.

QUESTION: Does the sale produce a capital loss of $20k reportable on F-1041? References to authoritative sources would be appreciated.

[New York Enrolled Agent]

It was not used for personal purposes by the estate or the woman's eventual beneficiaries, but rather was "investment property" for the four day interval between DOD and COE.

QUESTION: Does the sale produce a capital loss of $20k reportable on F-1041? References to authoritative sources would be appreciated.

Roland

You might want to take a look at SCA 1998-012. IMO, It would weigh heavily against any loss based on your set of facts.

Thinking about the new §6694 penalties, I would find it difficult for you to convince me that there is a MLTN chance that those 4 days converted the house into investment property.

[Snaggletooth]

The Plot Thickens

I truly believe this was "investment property." Reading the original post, this was not something that happened in four days, but in the period from January to May. The decedent was not using this house for a residence at the time of death. She had been moved out four months earlier to a nursing home.

Having said this, "investment" property is not the same as "business" property, thus the Chief Consul's 1998 opinion may yet prevail. Had the woman outlived the closing, she would have certainly taken the exemption on the sale of a personal residence because there would not have been a stepped-up basis. Moving out would not have disqualified the residency criteria of two years in the last five.

But we can't think in terms of locking into a certain way of thought which applies to one situation when the situation changes. We can't metamorphize one set of rules from one scenario to the next. The new situation may have its own regs and cites which may be totally new and unrelated in perspective.

The Chief Consul's opinion clearly would disallow the 1041 loss on a personal residence, but would allow the loss on "business" property. The property was neither -- it was held for sale at the time of death. Even though the personal residence rules would have applied had she lived, the complexion has changed, as we can find overwhelming evidence that taxability changes dramatically upon death.

However, in absence of any other citations, I believe the intent of SCA 1998-012 was to disallow a loss in this situation. I disagree that the preparer would be in jeopardy of a MLTN penalty unless the deceased were living in the house at the time of death.

[OtisMozzetti]

Income in Respect of a Decedent

I am not going to say that the following is and must be the way the sale is treated, but it is worth considering: was this income (gain in all likelihood) in respect of a decedent inasmuch as the sales contract had been agreed to before she died?

[ED SMITH]

Usually, when one party to a contract dies, the contract becomes null and void.
That would mean that the sale should not have gone through and her estate should have gone through probate, in the absence of a revocable trust.

Because of the circumstances of her age, there might have been something in the sales contract that covered this eventuality.

Also, the premise that because she was in the nursing home, her house was no longer her residence, I think would be considered a temporary absense and would not change the nature of the property. By selling the house, she would have made the nursing home her permanent residence.

[David1980]

The reason this is a question is most likely because of the following from Publication 559.

Sale of decedent's residence. If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you did not rent it out. If, however, the house is not held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent-free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss is not deductible.

So the real question in my eyes is given these set of circumstances is the house sold by the decedent or is it sold by the estate? If it was considered sold by the estate then yes, the loss should be allowed. If it is considered sold by the decedent then no loss allowed (and probably basis of whatever decedent's basis was resulting in gain?) I don't know, my gut feeling is that since the house was effectively sold before the decedent died (contract was signed/all work was done) it would be considered sold by the decedent. Kind of like how when you have stock that has trade date and a settlement date and the date you use is the trade date.

[joanmcq]

The exact same thing happened to me when my dad died...house closed escrow 4 days after he died. As far as I know the estate did not take a loss on the sale...but made the sale value subject to inheritance tax in PA! and subject to the lawyer's fees. The sale still went through (thank god! it was on the market for over a year), and I do not think it had to be probated.

[S T]

Similar Issue on Estate

Just completed one and after researching decided NOT to give the loss (which would have been the realtor fees and closing costs) to the estate on form 1041.

I would have to "google" again and research, but something about the beneficiary being the executor of the estate. Also escrow statement was in the name of the deceased, not the name of the estate.

My client was fine with not taking the additional loss.

Sandy

[OtisMozzetti]

Estate took loss on sale of real estate

This is a description of a sale of residence where the person who died did not try to sell it before she died:

More than a decade ago, I served as executor of my mother's estate which included her residence. I was also one of the two beneficiaries. The estate paid for an appraisal of the value when she died. On the advice of a lawyer, I obtained written acknowledgement from the other beneficiary that she was satisfied with the proposed sale of the real estate. The estate sold the property at a loss compared with the stepped-up basis of the property, since the estate was a motivated seller, and since there were a few minor expenses of sale. The loss on Form 1041 by the estate was passed through a few months later to the two beneficiaries via Forms K-1.