Life Estate, Life tenant dies

[juva]

My mom passed away in March with a life estate on her home. Upon her death, it went to me. It was sold within 1 month. So the cost basis (stepped up basis) is the value at time of death less some closing costs resulting a loss. I believe I can take the loss up to $3000 on 2019 taxes. I will be getting a 1099 from the closing company. Do I just put the transaction on the Schedule D with the following info:

     date acquired and sold

     basis and adjusted sale price

     loss

thanks

[Carl]

If this property was her primary residence at the time of her passing, then be aware that losses on the sale of personal property are never deductible. Period. Commonly when inheritied property is sold it's sold for an amount equal to the step up basis or less, thus resulting in no taxable gain. When sold for less than the step up basis, the loss is not deductible. Period. But at least you're not paying taxes on any gain that you may have "really" realized.

Another thing that matters in your specific case is the fact that your mom did not own the property - the estate did. So it matters on how the estate was set up in accordance with state law (not just federal law). But again, since the property was not being used for businses at the time of her passing, you basically have the sale of a 2nd home and any losses on the sale of that personal property are just flat out not deductible.

Overall, I would suggest you confer with an attorney on this, or better yet the attorney who set up the life estate. Overall I would not expect such an attorney to be all that knowledgeable on the tax side of things though. So a CPA or tax attorney might be better suited for this.

[TomD8]

A capital loss can be taken when an inherited property is sold for less than its stepped-up basis, provided  that the seller never used the home as their personal residence.

https://www.nolo.com/legal-encyclopedia/if-you-inherit-home-do-you-qualify-the-home-sale-tax-exclusi...

https://info.legalzoom.com/tax-consequences-selling-inherited-home-23797.html

But if the seller did use the inherited home as their own residence, it would have become personal property, and as such, the seller would not be able to deduct a loss on the sale.

[juva]

Good morning

I an not an expert but have been researching this as well and what I find is that I could deduct a loss.

We would report on #8949, which transfers to Sch D.

We use the stepped up basis and for the date acquired, we put 'inherited'.

Then the date sold and the amount realized.

If the amount realized us less than the basis, we would have a capital loss.

[Hal_Al]

I concur, the loss is deductible.  As long as the property was not used for personal use (unlikely if sold in a month), it is treated as investment property and the loss is deductible on Schedule D.

If you have no other capital gains to offset, you may deduct up to $3000, and any additional loss is carried forward to next year.

[juva]

Thank you.

One additional question.

My mother passed on 3/11/19 and we sold 5/4/19.

What I have read is that it has to go under Long term not short term.

So, in date acquired, I need to input 'inherited' so it does to long term.

I have turbo tax premier, under investment income will it allow me to enter inherited instead of a date?

thanks

judy

[Hal_Al]

yes, TT will enter inherited

[Carl]

On the screen for "Tell us how you acquired this home" make sure you are selecting "inheritance". THen you will "NOT" be asked for date you purchased the home. Instead, you'll be asked for date you "inherited" the "investment".

Then on the screen for "Loss on Property" if this home was "NEVER EVER EVER" used for "ANY" business purposes, (to include renting it out or having claimed home office expenses) by you, then you select "I used this for personal non-investment purposes" and press on. Your loss on the sale will *not* be allowed.

If the property was used *by you* for business purposes, then you flat out do not report the sale in the investments section.

If used as an investment, then while you're report the sale in the investments section, you will not report it as the sale of a 2nd home.

[Vfdjnk]

How would things differ if the house were sold six months after its inheritance to allow time for several home improvements (i.e. upgraded kitchen and bathrooms)?    I assume I'd need to identify the "stepped up" cost basis at the time the life tenant dies, and then at the time of the sale determine a "current" cost basis (stepped up basis plus cost of permanent improvements) ?   Would capital gains then be the sale price-"current" cost basis, less any closing costs?  

[Hal_Al]

@Vfdjnk - Yes, that's exactly right.