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Discussion:Gain or loss on inheritance - residence

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Discussion Forum Index --> Tax Questions --> Gain or loss on inheritance - residence


Link1time (talk|edits) said:

26 January 2007
First, mother dies, three children inherit her home. They want to sell property for assessed value. Their basis would be the fair value at the time of the mother’s death. If the amount they sell for is above the value at time of death, there is a gain, but if they sell for less, do they get the loss since it was not their principal residence?

Death&Taxes (talk|edits) said:

26 January 2007
There are several discussions of this issue, but I think the consensus is yes, the estate will take the loss, if none of them have used the property after death.

Kevinh5 (talk|edits) said:

26 January 2007
Estelle Marx, 1945 5 TC 1730 - taxpayer won,


IRS disagrees

SCA 198-012 IRC Sec. 641(b) and Sec. 165(c)

WesR (talk|edits) said:

26 January 2007
Hi they will not sell the home "above" FMV because you will use that FMV as your date of death value unless more than say 9 months have passed and the property really has appreciated after death. So under that circumstance you will always have a capital loss. bye

Death&Taxes (talk|edits) said:

26 January 2007
Like the "Headliner" that has caused so many posts here about S Corp Health Insurance, that Service Center Advice has done likewise. It is Service Center Advice, not a position won in Court or settled by law.

Kevinh5 (talk|edits) said:

26 January 2007
I agree. How do we link to a Service Center Advice? I am trying to even find it on the IRS website.

The expenses of necessary sale may be treated as administration expenses for the estate (not subject to 2% on line 15a of the 1041). Necessary is defined as being required to raise cash for the payment of taxes, debts, or estate costs, or to facilitate the distribution of the asset among numerous beneficiaries.

JR1 (talk|edits) said:

January 26, 2007
Dennis has logged in on this on another thread or two. Wes is right, if it sells high, that is the fmv...but trying to remember what I learned there from Dennis, I seem to recall that the estate has to sell the home, so that if there is a loss, it can take it. If the home is distributed out and a loss occurs, no one can take it. Hoping he shows up to grade my paper.

Kevinh5 (talk|edits) said:

26 January 2007
Well, the 1 in 3 rule would seem to apply - since the SCA doesn't have as much weight as a tax court case.

Dennis (talk|edits) said:

26 January 2007
SCA 1998-012 All the IRS says is that it depends on specific facts on a case by case basis. You need to pay attention to specific state law. There is a question as to whether the selling expense is capitalized (Most of us do that) or deducted against income. There is also the question of on whose return the loss is recognized. If there is no reason to sell rather than distribute the loss should be taken on beneficiaries personal returns. Personal use taints. Mortgage interest should be taken as investment interest because to be deductible as mortgage interest the property has to be used by beneficiary as either first or second residence. Proximity of sale to date of death matters. The longer it takes to sell the better the IRS case for personal use during the interim.

Tdoyle (talk|edits) said:

January 26, 2007
SCAs from 1997-2003 are available on the IRS website at http://www.irs.gov/pub/irs-sca/

- Tim Doyle, TaxAlmanac Moderator - Talk to me 09:33, 26 January 2007 (CST)

Kevinh5 (talk|edits) said:

26 January 2007
Thanks, Dennis and Tim for providing the links. I'll learn how to do that soon.

When I read the SCA, Dennis, the question asked is not "can someone take a loss" but rather "who can take the loss". Page 3 makes it sound like the heirs take the loss on their 1040s (Petersen v. Commissioner, 35 T.C. 962 (1961), acq. 1962-1 C.B. 4.)

Dennis (talk|edits) said:

26 January 2007
If there is no reason for the estate to sell (You need to know state law)the property is deemed distributed and loss is taken on beneficiaries' 1040.

Tdoyle (talk|edits) said:

January 26, 2007
Kevin:

As part of my effort to locate material that we might import here to TaxAlmanac (allows full content searches as well as links between documents), I put together the following outline of the IRS website. Note that the IRS has their web user interface, but they also have their data stored in a directory structure that can be accessed directly. Feel free to use this page if you'd like.

IRS Website Content Organizational Structure


- Tim Doyle, TaxAlmanac Moderator - Talk to me 10:01, 26 January 2007 (CST)

Link1time (talk|edits) said:

26 January 2007
The state I'm refering to is Virginia.

Kevinh5 (talk|edits) said:

26 January 2007
Link, my understanding then is that you have to find out whether title to real property vests in the heirs or devisees immediately upon the death of a decedent in Virginia or not. I am not a Virginia attorney and don't practice there, so I don't know the answer.

Bengoshi (talk|edits) said:

26 January 2007
In determining the FMV on date of death, is the 9 months that Wes referred to a practical guideline?

Dennis (talk|edits) said:

26 January 2007
The "and" in Wes's post is the practical advice. The validity of sale price as valuation decreases with time. You can't do these things in the dark. You have to know what the real estate market is doing in the property area.

Bengoshi (talk|edits) said:

26 January 2007
Thank you Dennis. I was just thinking about that b/c I've seen where property sold for $500,000, when an appraisal a few months earlier valued the prop at $450,000. Of course this was Hawaii where a single family dwelling in town might set one back over $600,000.

Mark Eason (talk|edits) said:

26 January 2007
In Virginia, you first look at how the property was titled. If it does not pass out of the estate at death, it remains in the estate until sold or distributed to heirs.

Mark Eason (talk|edits) said:

26 January 2007
After reading SCA 1998-012, I will double check if the property vests with the beneficiaries.

Dennis - Any source for treating mortgage interest being investment interest. I have an estate that paid over $10,000 in mortgage interest. What happens with the suspended investement interest in the final year of the estate? What happens when the house is sold (is the house then investment income)?

Theresa d (talk|edits) said:

26 January 2007
My understanding was that the sale of the house by the estate would generally always result in a loss which was deductible to the estate. since the house was valued at dod value, assuming it is sold shortly after death and was never income producing, the cost of sale -brokers fees etc could be added to basis and a loss created. reading the SCA has me confused-a loss on the decedents personal residence is not deductible? doesn't make sense as estate assets were used to pay these expenses. especially a taxable estate. estate tax was paid on estate assets which have now been reduced. the SCA is not definitive therefore I am sticking with my understanding. What do you think?

Dennis (talk|edits) said:

27 January 2007
No specific source on investment interest, Mark...but what else could it be? Your claim for loss rests on the property being held for investment. The K-1's used to have write in lines for unspecified termination pass throughs. Now they don't even have a code for other. The authority for the pass through on termination would have to be Sec. 642(h)(2). I've always taken it. On the other hand the IRS does not audit 1041's. I will continue unless Riley says I can't. ProSeries loses the unused investment interest, but there are a lot of other things it does wrong.
  • Questions from a non-tax-pro were moved to a different discussion, here.

ReadMyLips (talk|edits) said:

27 September 2008
I'm resurrecting this thread because I have a related situation that I asked in an earlier thread without benefit of the wisdom in this thread.

Client died 3/1/07 and residence was sold 7/1/07, no 706 required and no formal appraisal of the residence as of dod. The proceeds of the sale went into a trust which will disburse all funds in 2008 to beneficiaries that live in Canada. The beneficiaries never used the residence personally during the 4-month period. Residence sold for $1m with $100k in closing costs; I think you can argue that it needed to be sold to facilitate distribution of funds to several beneficiaries, which would be an administrative expense. Right? Or at the very least a capital loss which would flow through to the beneficiaries in the final year.

Any new insight or thoughts on this subject?

Riley2 (talk|edits) said:

28 September 2008
It doesn't really matter whether the sale was necessary to facilitate the distribution to the beneficiaries since no 706 is being filed. The closing costs are just a reduction of the realized gain or increase in the realized loss.

HarryEA (talk|edits) said:

19 January 2011
I'm resurrecting this thread because I have a somewhat related question. Did I see recently that the loss on the sale of the principle residence after a person dies, no longer passes through to the beneficiaries? i.e. person dies, house is appraised for $500k at DOD, then sells for $400k. No loss passes through on the 1041?

LJK CPA (talk|edits) said:

26 January 2011
I thought I read this, too. Of course, now I can't find it. Anyone?



Swheeler (talk|edits) said:

16 January 2013
The resurrection of this thread makes all others lame in comparison. Any update on this verdict? I remember taking losses on principal residences after death and passing them through on short term trusts, but the SCA 1998-012 appears clear that they will disallow such losses. I am in CA. Does anyone have any more current info on this topic?

Ckenefick (talk|edits) said:

17 January 2013
I haven't heard or seen anything on it...but you know, that's how our government operates a lot of time. A lot of talk, a lot of scare...and then.....then....over....time...the issue....


fades


away

Dennis (talk|edits) said:

17 January 2013
Those who read the SCA and interpret the language to say decedent's personal residence is not a capital asset which, absent personal use, is held for the production of income, might be well advised to seek another line of work.

Swheeler (talk|edits) said:

17 January 2013
That's a bit harsh Dennis. I remember taking the position when i used to do more work on trusts in the mid 90s, that the character of the property in the hands of the trust changes to investment property and then deal with it accordingly. Most CPAs in my area were doing the same. After reading the SCA from 1998, I was just wondering if the IRS had come up with anything more definitive and what was and wasn't a loss. I can't ever seem to find answers to questions like these in Thomson Reuters or Parker. Most of these types of trusts where the residence is the main asset are first and final so anything passes through to the beneficiaries. The interesting part here is that in a down market, some potential until recently, for decent losses if the property is held for a year.

Swheeler (talk|edits) said:

17 January 2013
By the way, here's my twist. Four beneficiaries of mom's house. However, one was living there and remained in the house and had to be evicted so it could be sold. The dilemma, is that person's 1/4 share a principal residence and thus not entitled to the capital loss on the sale?

Does this jeopardize the others from taking a capital loss? Only your hairdresser knows for sure!

My take, I'm going to treat this as a loss to three of the four beneficiaries and no pass through to the one living there under hostile terms.

STG (talk|edits) said:

19 January 2013
Does the hostile terms matter? If one of four stays in house for several years to wait recovery of housing market does that make it an investment for 3 and personal use for one?

STG (talk|edits) said:

19 January 2013
Does the hostile terms matter? If one of four stays in house for several years to wait recovery of housing market does that make it an investment for 3 and personal use for one?

Dennis (talk|edits) said:

20 January 2013
Absent specific document language, if one of four resides it is personal for all. All the SCA says is that you have to be prepared to prove no personal use and you have to pay attention where the gain or loss gets reported. It is unfortunate, but typical , that the Service uses scare tactics in its language. Experienced practitioners should be used yo this technique.

Lisaw (talk|edits) said:

9 March 2013
I wanted to revisit this and ask for guidance. I am working on a irrevocable trust that sold the primary residence immediately following death and would like to recoup selling expenses as a loss passed through to the beneficiaries. I have been reading and am now more thoroughly confused then before. I have seen arguments both ways.

Doug M (talk|edits) said:

9 March 2013
If there was no personal use of the property between DOD and sale..........

Lisaw (talk|edits) said:

10 March 2013
that is correct absolutely no personal use but also no attempt to convert to a rental property or to hold for investment. Just liquidated to facilitate distribution.

Doug M (talk|edits) said:

10 March 2013
Sales price is indicative of FMV on date of death. Transaction (closing costs, realtor commission) costs to sell property become capital loss.

Lisaw (talk|edits) said:

10 March 2013
Thanks very much Doug. I actually found a nice summary of the personal residence dilemna in a 1041 course document from Cal CPA that was very useful in explaining the differences of opinion on the issue.

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