Can a Long-term Capital Loss on the sale of an inherited house be used as a deduction against my personal income

[GeneE]

Can the long-term capital loss associated with relator fees on the sale of an inherited home, subsequently reported on a K-1, be deducted on my personal taxes when the only income from the inheritance was interest from a bank account earned on the proceeds from the sale on the inherited home? 

I am filing a final 1041 this year for a trust directly related to the death of my parent in 2018. I made the final distribution in 2019, which included approximate $50 in interest on a bank account that held the money from the sale of an inherited house. The business version of TurboTax instructed me in 2018 to record a long-term capital loss against the sale of the house because of the Relator (and other legal) fees incurred by the sale. Now, because I am filing the final 1041 for the trust for 2019, the business version of TurboTax is instructing me to distribute the long-term capital loss on the K-1s being produced for myself and my siblings. However, allowing the deduction on my personal taxes due to fees associated with the sale seems counter intuitive. The home was sold at a stepped up basis due to inheritance. It was not lived in after the death, and was never used as a rental.

So, can I actually use the fees associated with the sale of the property that was inherited, as a deduction against my personal income in 2019 (because I did not receive the full stepped up basis)?

[tagteam · Accepted solution]

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@GeneE wrote:

...allowing the deduction on my personal taxes due to fees associated with the sale seems counter intuitive.

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The formula, regardless of whether or not the property was held in a trust, is the total sales price less selling expenses less adjusted basis equals net gain(loss). 

In your case, the adjusted basis is the stepped-up basis as of the date of death of the decedent and, apparently, the trust has a loss since the sales price less selling expenses is less than that basis. Therefore, provided this is the final return for the trust, the loss can be distributed to the beneficiaries (as a long-term capital loss). 

[NCperson]

and that loss can be netted against other capital gains... and if there are no other capital gains. up to $3,000 can be netted against ordinary losses each year until extinguished.