Can we claim the sale of an inherited property as a loss?

[2HOTinPHX]

So my siblings and I inherited parents house in January 2020. One sibling had been living with them for 5+ years since it was so expensive for a single person to rent in the area. It was beneficial for all parties which was wonderful.
So then Covid hits and were thinking it would probably only be a few months before we could safely travel to go thru the stuff in the house. We all agreed that the brother living there should stay there and he did not need to pay any rent cause he is family and would be taking care of the place. Finally after over a year plus of waiting the siblings there decided to get the house ready and sold.
So we get this K-1 form info from sibling who is trustee and the accountant he is using. It is saying we can do a capital loss on the sale of the house and each take a small deduction. So I am looking into it more and it appears because we let the one sibling stay there we may not qualify for the deduction
https://www.irs.gov/newsroom/helpful-facts-to-know-about-capital-gains-and-losses
From the IRS.Capital Losses
Taxpayers whose capital losses are more than their capital gains can deduct the difference as losses on their tax returns, up to $3,000 per year, or $1,500 if married and filing a separate return. When their total net capital loss is more than the limit they can deduct, taxpayers can carry it over to next year's tax return.
Capital loss deductions are applicable to the sale of investment property, but not on the sale of property held for personal use.

Anyone have experience with this?
I know some siblings will probably say so what how would the IRS find out if the sibling had another out of town address...ect ect...but doesn't feel right to me. Any thoughts?

https://www.sapling.com/11414730/can-claim-sale-inherited-property-loss

 

[Aerides]

I mean it says right in that piece you linked:

"If, after inheriting, you and your family moved into the home and lived there, you don't get to write off any losses when you sell."

And that sibling who lived there for 5 years undoubtedly used that address, likely on his own tax filings, so pretending otherwise might not work well.

I'm with you, unless the law is specific to name on mortgage/deed, etc., vs. just physically having had lived there.

 

[braumeister]

Are you sure it's a loss anyway? Selling a house over two years after inheriting it for less than its value then sounds unlikely to me, but of course I don't know the details.

 

[Gumby]

The last two years have not exactly been a bear market for residential property.

 

[2HOTinPHX]

Are you sure it's a loss anyway? Selling a house over two years after inheriting it for less than its value then sounds unlikely to me, but of course I don't know the details.

Apparently so....brother said You'll notice that the form shows that there
is actually a deduction to claim against your income. The reason is that the 'comp' house was at a higher price than we sold the parents' house for, and so there were no capital gains over the year that we delayed selling it.

 

[cathy63]

You can only take a capital loss on investment property, not personal property. If you converted the inheritance from investment to personal property by letting a family member live there without paying fair market rent, then you can't take a loss. Ideally the sib who lived there would have paid rent to the other sibs once they became his landlords. He still would have gotten a discount because he wouldn't have to pay rent to himself (i.e. if there are 4 of you, he would only pay 75% of the normal rent). Then you all could have taken a capital loss if there is one.

I question whether there's really a loss there though. The real estate market has been crazy for the past two years. It's hard to believe that even with selling expenses you would end up netting less than the appraised value on the date of death. Of course if you do end up with a gain, then that is taxable, even though it's personal property, so maybe you don't want to dig into that too much.

 

[Sunset]

I'm no tax expert, but the personal use aspect is different for each sibling.


I think the sibling that lived in the house cannot claim any loss, but the other siblings can as they had no personal use of the property.



From the other siblings perspective it's the same as if the house was empty for 2 years and then sold.

 

[SecondCor521]

Since selling expenses (which include realtor fees) can reduce net proceeds, in a flat market a capital loss isn't surprising to me.

Otherwise I agree with @cathy63's analysis.

@Sunset, even if the house were empty or treated as though it were, it still would not make it an investment property and therefore still wouldn't result in the ability to use the capital loss.

Since you received a K-1, I think the proper way to report it is on Form 8949 as a tentative capital loss but then enter an adjustment for a positive amount equal to the loss and an adjustment code of "L".

 

[cathy63]

...
I think the sibling that lived in the house cannot claim any loss, but the other siblings can as they had no personal use of the property.

From the other siblings perspective it's the same as if the house was empty for 2 years and then sold.

The analysis of personal use is per property, not per owner.

See https://www.irs.gov/taxtopics/tc415

A day of personal use of a dwelling unit is any day that the unit is used by:

- You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement
...

The arrangement described by OP will definitely be considered personal use by the IRS. Further, the fair market value of the rent not paid was a gift from the other owners and is subject to gift tax reporting if it exceeds the exclusion amount of $15K per donor per year.

 

[Sunset]

Well, I've learned something today and that is great.

Also glad I haven't done my tax return yet

 

[2HOTinPHX]

Thanks for the all the replies so far.

I too find it hard to see how there was a loss in this hot market. I have not seen the numbers or comp.

https://www.irs.gov/pub/irs-pdf/p559.pdf
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 didn't rent it out. If, however, the house isn't 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 isn't deductible.

 

[Philliefan33]

I won’t pretend to know the tax law in this area, but I saw this situation at our AARP TaxAide site last Friday. The taxpayer came in with. K-1 with just one box filled in. We looked in our reference material (Pub 4012) to be sure the return was in scope and to learn what the code indicated. The return was in scope, the code indicated that the amount noted was long-term capital loss carry forward for the TP.

The info on the K-1 said it was from an estate or trust. The TP explained that she and her siblings had sold the father’s house at a loss after he died, and the attorney split the loss among the three siblings.

Now, I seem to recall from somewhere in the depths of my AARP trading that one cannot claim a loss from an inherited property if the selling price is less that the value of the property on the day it is inherited. I’m not sure.

Maybe the tax law has changed, or maybe if there is a trust involved there are different rules?

 

[2HOTinPHX]

The analysis of personal use is per property, not per owner.

See https://www.irs.gov/taxtopics/tc415



The arrangement described by OP will definitely be considered personal use by the IRS. Further, the fair market value of the rent not paid was a gift from the other owners and is subject to gift tax reporting if it exceeds the exclusion amount of $15K per donor per year.

Good points..thanks ...