Inherited home, land sold for loss

[Tax Prep by Deb]

I have a client whose father passed away in 2008. His only assets was some money and his personal residence.

Because of the size of the estate, no need for inheritance return.

My client is one of four siblings and the house was to be divided evenly between the four. The property was appraised at 135,000 when he passed away. They held onto the property in hopes that the market would improve, they finally decided to sell and by the time the basis is adjusted by the four siblings each sufferred a 25,000 loss.

My clients brother told her that the loss helped him greatly on his tax return. Before the loss he was only getting a 1,000 loss but with the loss he's now getting around 9,000.

I tried to tell my client that alot of factors could be at play here and that she can't compare her situation to his.

At any rate because she has no other investment income to use the loss against, she is only able to claim the 3,000.00 loss and then carry over the rest.

Am I right in this situation, or does the other tax preparer have some magic? The property was never used for rental or any other income producing business. Basically it has sat empty since the fathers death.

Any feedback would be greatly appreciated. My client is suppose to check with her brother before we finalize her return.

Thanks,

Deb!

[jainen]

>>each sufferred a 25,000 loss<<

You mean in two years the property lost 75% of its value so they each agreed to cash out less than $9,000 in an arms-length transaction? Well, the brother at least was able to double his cash. Apparently he had $25000 in short term capital gains in the 33% bracket.

[mcb39]

Just had a new client come in who did her own taxes last year. She has a LT Capital loss of over $300,000. She said she inherited her father's house. FMV was over $600,000. She sold it for $240,000. Have not dived into this return yet, but is giving me a kind of uneasy feeling. Should I be concerned.? Jainen?

[jainen]

>>Have not dived into this return yet<<

Which tax year does your engagement letter specify?

[michaelmars]

>>Have not dived into this return yet<<

Which tax year does your engagement letter specify?

when did she inherit it, last year or 20 years ago?

[ljwalters]

IMHO there is no loss. This property was not used as income generating of any kind, therefore is personal property and no loss.

Please correct me if I’m wrong.

Linda and buddy

[Tax Prep by Deb]

>>each sufferred a 25,000 loss<<

You mean in two years the property lost 75% of its value so they each agreed to cash out less than $9,000 in an arms-length transaction? Well, the brother at least was able to double his cash. Apparently he had $25000 in short term capital gains in the 33% bracket.

Yes, Jainen.

This all happened in the Central Valley which has been hit extremely hard with the houseing crisis.

In 08 when he passed away the property value had already dipped. They held onto it in hopes that things would recover, however where this house is situated is in a very small rural town and things just aren't happening, so they made the decision to sell now in case things continue to get worse.

The offset on other capital gains was exactly my thinking on the difference of refunds, but it's difficult to make a client understand that what works well for one person may not work well for them. I told her she can not compare apples to oranges, something else is taking place on his return.

Thanks for jumping in on this. So I'm right in saying she can only claim 3,000 loss and carry the remainder forward?

Deb!

[OldJack]

They held onto the property in hopes that the market would improve, they finally decided to sell and by the time the basis is adjusted by the four siblings each sufferred a 25,000 loss.

Deb!

It appears to me, from the above statement, that the property was held as investment property and the fact there was no income for the investment holding period is irrelevant. I would take the loss on 1040 Sch-D.

[kcjenkins]

IMHO there is no loss. This property was not used as income generating of any kind, therefore is personal property and no loss.

Please correct me if I’m wrong.

Linda and buddy

OK, I will correct you on this one, Linda. They held on to it as an investment, never used it personally. When you inherit property, unless it is of an inherent personal nature, it is assumed to be 'investment property' unless it is either converted by use into personal, or by use, into rental or business property. Aunt Sue's Mink coat is inherently personal, so unless you start renting it out on a regular basis, it's personal property. But real estate is either an investment, if simply held, or personal if used as a residence, or business if rented.

[ljwalters]

OK, I will correct you on this one, Linda. They held on to it as an investment, never used it personally. When you inherit property, unless it is of an inherent personal nature, it is assumed to be 'investment property' unless it is either converted by use into personal, or by use, into rental or business property. Aunt Sue's Mink coat is inherently personal, so unless you start renting it out on a regular basis, it's personal property. But real estate is either an investment, if simply held, or personal if used as a residence, or business if rented.

Thank you,

Thats why I read this board, to correct my misconceptions.

Linda and buddy

[Tax Prep by Deb]

Update!

Client asked brother, brother said it was reported on 4797. But again, this property never generated any income of any kind. I still feel that schedule D is the way to go.

Am I right or wrong?

Deb!

[Lion EA]

Have your client ask his brother what to use for depreciation?!

[OldJack]

Update!

Client asked brother, brother said it was reported on 4797.

Deb!

Brother liked form 4797 as a loss in part II passes to 1040 page 1 as a fully deductible loss. However, form 4797 is only for depreciable business property, property used in a trade or business, and involumtary conversions. This property does not fit into that classification as it has never been used as such before or after death. If he reported it in Part I, it would flow to Sch-D and have the same result as reporting it on Sch-D in the first place.

[kcjenkins]

Sch D is the correct choice. It is not 4797 property. Although it would be nice if it was, that way can lead to a nice deduction now, followed by a big bill with penalty and interest in a couple of years. Even tho IRS often misses things, the absence of any business income reported in prior years is sure to kick out of any decent matching program at the IRS.