Why is this such a hard question? Sold Inherited House at a Loss! Do I play taxes?

Question

According to the IRS and other posts on the internet

Gains on the sale of an inherited house (we used for rent but did not live in for more than 2 years) are taxable. Losses are not deductable. To me, losses not being deductible doesn't mean you have to pay taxes on the amount that is less than FMV at the time of death.

My parents sold the house they inherited 10 years ago well below the price it was worth when my grandparents died. I'm assuming that since this is NOT a gain we don't have to pay taxes. but no one has said anything so CLEARLY. I don't understand why this is so hard a question to ask. No one is straight-forward with the answer. They just say get a professional.

My parents asked a friend (not a very knowledgeable one) who works for Jackson Hewitt if she had to pay taxes and she said yes. Now i want to know the basis. I'm going to talk to her myself but i want to make sure i have my facts right first.

Thanks!

Answer 1

If you're thinking about capital GAINS and you didn't GAIN then your thinking incorrectly. The taxes aren't about making a profit. It's about having money above and beyond your regular income. What you or they thought the house was worth doesn't even figure into the equation. Something is only worth what someone is willing to pay for it so the fact that they didn't get more for it says it was NOT worth more. But worth is not the question anyway.

You're not going to get a better answer in this kind of forum than see a professional. Yes you will have to pay taxes so stop being stubborn and go ask a professional why.

Answer 2

Just because your parents sold the house below its FMV does NOT mean you have a loss for tax purposes. A loss is generated if the cost basis was greater than the sales proceeds. You have to figure out what the cost basis of the home was, and what it was sold for. The cost basis of the house depends on whether the house was a gift or part of an estate, etc.

If this was a home that wasnt lived in more than two years, a gain would be a taxable capital gain. A loss would be a capital loss deductible up to ($3,000) per year, with the remainder carried forward to future years.

However, you mentioned the property being rented. If this was a rental property (Im assuming someone filed Schedule E with their individual tax return, reporting rental income and expenses), the cost basis would have to be adjusted for any depreciation expense allowable on the property, whether deducted or not. The sale would be reported on Form 4797 as a sale of business property.

As you can see, the tax rules can become quite complex. You can get some good information on this website, but it would be in your best interest to consult a professional (not a Jackson Hewitt employee). There are too many variables for someone to give you an accurate detailed answer.

Answer 3

You are dealing with 2 different issues here. In most cases the FMV at the time of death is the deciding factor for the basis. Although you can also use other factors for deciding basis. Now the personal rep for the estate can choose another date to determine the basis. Now that fact that this was rental property is another factor in the basis. The value under the special use valuation method for real property used in farming or other closely held business, if chosen for estate tax purposes.

Now if the FMV of the property was $100 and I sold the property for $90 then I pay no taxes on the $90. You would show a $10 loss on your 1040. If you sold the property for $110 then you have a $10 gain.

Now if your family never lived in this home and it was only used as a rental then you do not have a capital gain or loss, this means there are no special tax rates that apply. You instead have either an ordinary loss or gain. This also means that you can only deduct losses up to the amount that you had in income.

Answer 4

Your basis normally is the value when you inherited it. However, as you rented it out, the depreciation allowed OR ALLOWABLE will reduce your basis when you sell. That could result in a taxable gain on sale if you took a fair amount of depreciation and your adjusted basis was now below the sales proceeds. In certain circumstances the depreciation recapture can be taxed as ordinary income even if you show a loss on the sale itself.

Answer 5

It is a hard question. See the link below - the IRS internal memo says no loss allowed if not converted to rental property. They are enforcing this only in certain areas of the country but not all. Most estate professionals say to take the loss because the IRS would lose in court.

http://www.irs.gov/pub/irs-wd/1998-012.pdf