Capital loss for inherited municipal bonds?

[anon30]

An estate holds zero-coupon municipal bonds which are tax-free at federal and state levels.  Their basis was reset on the Date of Death, and inheritance taxes were paid to the state based on their new values.  Later, some of the bonds were sold for less than their value on the Date of Death.  Is this considered a capital loss?  Or is the loss amortized as a reduction in the interest paid?  Any pointers to the relevant IRC or other authority would be appreciated.

[M-MTax]

maybe the irs pub will help? https://www.irs.gov/pub/irs-pdf/p550.pdf ..... page 13 and on?

but I don't see this as different than ordinary because the bonds were marked to FMV on the Date of Death so a capital loss.

[ShirlynW · Accepted solution]

 This would be considered a capital loss.

IRS Pub 551, page 10, list the methods for determining the basis for inherited property. One method is the FMV of the property at the date of the individual's death. This would be your basis in the bonds. If the total liquidating distributions you received are less than the basis of your bonds, you may have a capital loss. 

A loss on the sale or other disposition of a tax-exempt state or local government bond is deductible as a capital loss.

If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you do not have ordinary income to offset it. The yearly limit on the amount of the capital loss an individual can deduct is $3,000 ($1,500 if you are married and file a separate return). If either your net loss is more than the yearly limit or your taxable income is less than zero, the loss can be carried over.

[anon30]

Thanks @ShirlynW  for your thorough reply.   Your assessment agrees with my understanding,  Now for part two of my question: 

A zero coupon municipal bond was distributed in-kind from an estate to a beneficiary.  The beneficiary then immediately sold the bond with a small capital loss.  The decedent  was a resident of the state in which the municipal bond was issued, however the beneficiary is a resident of another state.  Is the beneficiary liable for tax on the interest which accrued while the bond was held during the life of the decedent?  Or only for the de minimus interest which accrued during the time between distribution and sale?  

[DavidD66 · Accepted solution]

Any interest that accrued during the life of the decedent would have been reflected in the value of the bond on the date of death.  The beneficiary would not have to recognize that interest as income.  Similarly, any interest that accrued between distribution and sale would have been reflected in the sales price of the bond.  The beneficiary doesn't have any interest income to report.