Can I claim expenses and loss for inherited property without income

[gjfudge]

My mother passed away in the last quarter of 2020 and left me a rental property in her will. She had received all rent for the year 2020 and her 2020 taxes have been filed and accepted by irs. I had some expenses during 2020 for the property after I inherited it but no income for it for 2020.  I have not filed my 2020 taxes yet and have an extension. Can I file Schedule 1 and Schedule E to claim my expenses and show a loss for the property?  I will show a profit or gain for 2021.

[M-MTax]

If it's yours and it was available for rental use then you can claim expenses even if you had no income. But depending on the facts and your other income the loss will be a passive loss and there might be a carryover.

[Carl]

Can I file Schedule 1 and Schedule E to claim my expenses and show a loss for the property?

Assuming you owned the property on or before Dec 31, 2020 (As opposed to the estate owning it) that shouldn't be a problem. Your cost basis in the property will be the FMV on the date of the original owner's passing, and not the date you acquired ownership. It may (or may not) be necessary to obtain an appraisal on the property in order to establish that FMV. Generally, if an appraisal was done within the last two years prior to your acquisition, that appraisal will suffice. Now there are many ways to establish FMV. But in my opinion (and we call know what opinions are like!) having a current appraisal is the best.

I will show a profit or gain for 2021.

While not impossible, I doubt it. Generally, residential rental real estate always operates at a loss on paper, at tax filing time. When you add up the allowed deductions of Mortgage Interest, property taxes, insurance, and the depreciation you are required to take by law, those four items alone almost always exceed the total rental income received for the tax year. Add to that the other allowed rental expenses (repairs, maint, advertising, etc) and you're practically guaranteed to operate at a loss.

However, if there's no mortgage on the property then chances are you will show a bit of a taxable gain. I myself have that situation with one of my properties that I paid off a number of years ago.

[tagteam]

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@Carl wrote:

Generally, if an appraisal was done within the last two years prior to your acquisition, that appraisal will suffice. 

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Is there any statutory (or other authority) for the above-quoted statement? 

I believe two years is far too long, as in the distant past, particularly if the appraisal was done prior to the death of the decedent and/or market conditions have changed.

Section 2032 provides for an alternate valuation date for certain large estates and the time frame is six months after the decedent's death. That particular section most likely does not apply to these facts, but it is illustrative of the fact that a timely appraisal (or valuation) is necessary; two years would not be timely.

Consequently, I would recommend that a date of death appraisal be obtained by a qualified real estate appraiser. 

[Carl]

Is there any statutory (or other authority) for the above-quoted statement?

That's why I say/said "GENERALLY". For example, where I live I would suggest an appraisal done within six months before/after the owner's passing. Whereas where my relatives live in N.C., property values haven't changed all that much in over 4 years.

Keep in mind also, that while an appraisal may be the best way to go, it's definitely not the only way by far.

[tagteam]

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@Carl wrote:

Keep in mind also, that while an appraisal may be the best way to go, it's definitely not the only way by far.

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Congress and the IRS do a fairly decent job of keeping the law, regulations, and rules in mind and, with regard to the "best way to go", a qualified appraisal is one which will be accepted by the IRS typically without question; that may not be the case with other methods of valuation.

Regardless, when you preface a sentence with "generally", what follows should be the general rule and the general rule is that a two-year appraisal will not suffice if the return is examined.