Can I claim a loss on inherited property?

August 10, 2011

From:  Ed
Date:  22 Dec 2009
Subject:  Capital Loss on Inherited Property

I inherited real property appraised at $550,000 at the time of my mother’s death on February 26, 2008. I recently sold the property for $390,000 on December 21, 2009. Improvements were made to the house. The house was never occupied or rented. Can I claim this loss?

Ed

Answer

Date:  11 Jan 2010

Hello Ed,

I’m going to assume this was your mother’s residence. (If it wasn’t, you can clearly claim the loss.)

The situation of an inherited residence is more involved. The IRS Chief Counsel’s office says in SCA 1998-012 that no loss can be claimed from the sale of a decedent’s personal residence unless the property has been converted to an income-producing purpose (such as a rental).

The Tax Court ruled in favor of taxpayer’s claiming long-term capital losses from sales of inherited residences in two cases, Pauline Miller Estate, TC Memo 1967-44, 26 TCM 229 (1967) and H.V. Watkins, TC Memo 1973-167, 32 TCM 809 (1973). In the Watkins case, the surviving husband and children lived in the home for six months after the decedent’s death before moving out and selling it.

If you decide to claim the loss, consider disclosing the authority on your income tax return and be prepared for a wrestling match with the IRS.

(By the way, I would not convert the house to a rental at this point, because the IRS will still try to limit the depreciable basis to the fair market value when it is converted to a rental.)

Good luck!
Mike Gray

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