Trust sold house at a loss

[JJStephens]

Client's mother died in February 2016. Her house was sold in November at a loss of $23,800 (the house was out-of-state and they wanted a quick sale). Estate had no other income/expense/gain/loss. It did receive a refund of overpaid real estate taxes but I believe that is immaterial.

I'm not real strong on trusts--okay, truth is I'm a complete bonehead on trusts!--so I need someone to see if I did my research correctly.

A loss on the sale of a personal residence is not deductible but when the house went into the estate it became investment property. Therefore, the loss passes through to the two beneficiaries on Schedule K-1 and they are able to deduct it on their personal returns. Is that accurate?

Also, anyone know if I need to file a copy with NJ (where the estate is domiciled)?

[Roberts]

Why do you think any house that's in an estate automatically becomes investment property?

[Roberts]

edit: In MY state (and I believe this is a state issue), the estate can't take a capital loss on the sale of personal property. On every estate I've worked with the attorney has basically  taken the position that the value of the residence at death is the net amount received as long as it's sold within 1 calendar year. That may not be correct in our state but that's what the attorney's have informed me. If they've owned it MORE than a year after death, they declare it investment property for speculation.

[Abby Normal]

We've always taken losses on houses in estates. Usually, just for the amount of the expenses of sale, because if it sells within a year or so, the best proof of value is the sales price, assuming arms-length deal.

[Lion EA]

If it's the final return, final K-1s, then loss passes through to beneficiaries.  I would take a loss if the executor has documentation:  DOD valuation, comps at time of sale, not to a related party, and it seemed reasonable.  If it was a $2.38 mil house that sold for a loss of $23,800 so out of state benes don't have to travel to look after it, sure.  If it was a $100,000 house, no.

That said, you'll have to find your own comfort level inside that range!

And, if I'm taking the loss (even if I'm not taking the loss) I'd have to look into handling the RE tax refund.  Seems like if it was an estate deduction, it would now be estate income.  Or, netted if same year.  Or, was it deducted while owner was still alive and refunded after death?

As I get older and all my clients getting older, I need to learn about estates.  But, not today while I'm in a panic over partnerships and S-corporations!  And, clients are wanting their returns TODAY before the blizzard. 

[grandmabee]

was it a trust or an estate.... you refer to both in your question.

[jklcpa]

2 hours ago, Roberts said:

edit: In MY state (and I believe this is a state issue), the estate can't take a capital loss on the sale of personal property. On every estate I've worked with the attorney has basically  taken the position that the value of the residence at death is the net amount received as long as it's sold within 1 calendar year. That may not be correct in our state but that's what the attorney's have informed me. If they've owned it MORE than a year after death, they declare it investment property for speculation.

Your state considers a house to be personal property?       Sorry, that just doesn't make sense to me when thinking about the types of property that can be in an estate: cash, intangibles, real property, and then personal (unproductive) property of the decedent. 

 

[Gail in Virginia]

From IRS publication 559, p. 17:

 

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.

[Tax Prep by Deb]

42 minutes ago, Gail in Virginia said:

From IRS publication 559, p. 17:

 

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.

Thanks so much for this reference.  I am doing my first trust return this year that is the situation mentioned above.  This will definitely get me started on the right track!

[BulldogTom]

The key to this all is what Lion said, it was sold to an unrelated party and in an arms length transaction.  Zillow is not a good reference for DOD, but a non-related realtor could be.  A full blown appraisal (have yet to see one of those on the trusts I do) is of course the best evidence of DOD valuation.

Most that I see throw a loss because of the selling expenses.  That should be expected.

Tom
Newark, CA

[Tax Prep by Deb]

Hey Tom,

Mine actually came with a full blown appraisal.  I was really shocked, but the escrow company required it before they would issue any title, so my client paid for the appraisal.

[SaraEA]

Whether this was a trust or estate makes a big difference.  If a trust owned the house and just sold it because it didn't want it anymore, loss is capital.  If an estate owned it, tax treatment depends on the will or state law if no will.  In one scenario, say the deceased left all assets to children and the estate sold the house to have cash to distribute.  In that case the sale was  made to benefit the beneficiaries and no loss is allowed.  (They really should have received a portion of the house each and sold it themselves.)  Sales expenses get added to investment amount but, as I said, loss is personal and disallowed.  If the house was sold to raise cash to pay the decedent's debts, sales expenses can be treated as administrative expenses and passed through to the beneficiaries.  NJ does have an inheritance tax, so you'll have to check if the value of the estate exceeds the state threshold.

[Roberts]

SaraEA is doing it the way my state requires it.

As Gail posted earlier: " If the estate is the legal owner of a decedent's residence" - that's where the STATE law comes into play. Who actually owns the property is determined by state law and not the IRS. In my state, beneficiary's are deemed the owner - not the estate so the sale by the home is for the benefit of the beneficiaries. You need to check your state law which can be rather difficult to get in my experience.