Inherited property sale at a loss
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Returning Member

Inherited property sale at a loss

In late 2008, my BIL and my wife inherited a property on my MIL's passing. In 2004, she had paid $104K for the property. In 2009, we did a "Quit claim" with my BIL and sent him $50K. We then used it as a rental through early 2019 at which time we sold it. During the rental years, I let TT depreciate and I put in all income and expenses.  Any improvements were included as yearly expenses.  I have had significant losses nearly every year. However, my earnings were too high to allow any losses to reduce my income taxes, we file jointly.  I have a significant carry-over loss being captured by TT.  In fact, in addition, after closing costs, we netted less than what my MIL paid for it! How do I calculate any capital gains/losses and where in TT should the sale be reported? What about inheritance taxes, will they apply somehow? I get confused by the scripts and don't know where to go with the sale: in Rental Properties and Royalties or in Business Items, Sale of Business Property. Thanks in advance for any guidance.

5 Replies
Level 15

Inherited property sale at a loss

You have a mess on your hands since you inherited the property ( mom's basis has nothing to do with it) and then bought 1/2 from the brother and then rented it.  Did you take any depreciation over the years ?  

 

I highly recommend you seek local professional help with this return especially if you have failed to take any depreciation ... those improvements probably were not deductible.  

 

When you sell a rental you must recapture the depreciation as ordinary income and the passive losses that were suspended are captured on the Sch E.   This can be confusing especially if you have not set it up properly in the system.  

Level 15

Inherited property sale at a loss

agree with @Critter 

 

from what you described there are no 'inheritance' taxes..... your cost basis to determine your profit loss on this property is based on what it was worth at date for your MIL's death.  That cost basis may be complicated because you purchased your BIL's interest and that wasn't an arm's length transaction - not a crisis, but certainly something a local accountant can ensure you don't overpay taxes on. 

Returning Member

Inherited property sale at a loss

Yes, I have been taking depreciation, so I will owe tax on that, correct? TT has been carrying forward the losses. My improvements included a new roof, new appliances, new flooring, all of which have been included in the carry over losses.  I expect you are right and I need to finally see a professional about this year's return. Thank you.

Returning Member

Inherited property sale at a loss

Thank you, I believe TT has been set up properly to do this transaction for me but I will have a professional confirm everything is correct. I will have to go back to when we started renting it to ensure I made the correct entries in TT.  

Level 15

Inherited property sale at a loss

you may not pay taxes on the recapture of the depreciation.... that is because all those losses that you have been carrying forward will now be able to be reflected on your taxes since you sold the property..... 

 

I suspect the few $100 you'll spend on an accountant will save you countless hours of responding to letters from the IRS in the future.... appears to be a good investment! 

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