Life estate

[hogebdg]

My mother passed away and was a tenant of a life estate. My two siblings and I now have the home. We are selling the home well below the cost basis of the home. Do we have to report this sale on our taxes

[Mike9241]

Sorry for your loss. your tax basis is the Fair Market Value on the date of the date of her death.

If the value of the home declines after the date of death, or if a loss is generated due to selling costs, case law (Miller, T.C. Memo. 1967-44, and Watkins, T.C. Memo. 1973-167) supports possible deductibility of the loss since the home is a capital asset held by the estate.

[Opus 17]

You may be able to treat this as the sale of investment property, rather than sale of a home.  As investment property, you can take a tax deduction for a loss (sale below cost basis) when you can't take a deduction for a loss on personal property.  The key question is did any of the siblings live in the home or use it for personal use.

For example, if sibling A lived in the home and took care of mom, but siblings B and C did not, then A can't deduct the loss on their share but B and C can deduct a loss.  Or, suppose mom had a house on a lake, and all the siblings took one last vacation at the lake before selling.  That would make the sale personal.

Also, if you received a 1099-S at the closing, you must report it on your tax return even if there is no taxable income or deductible loss, because the IRS will be looking for that 1099-S to be accounted for. 

[M-MTax · Accepted solution]

supports possible deductibility of the loss since the home is a capital asset held by the estate.

This was a life estate so the home never wound up in the estate at all.....title vested in the remaindermen as soon as mom passed.

[M-MTax]

For example, if sibling A lived in the home and took care of mom, but siblings B and C did not, then A can't deduct the loss on their share but B and C can deduct a loss.

That also makes no difference because a sibling would have lived in the home before they had any interest in the home that could be conveyed.....they only had a remainder. So the issue is whether a sibling lived in the home after mom passed and before it was sold.

[M-MTax]

There is also this on the subject of a deduction by the estate.

https://www.thetaxadviser.com/issues/2023/apr/10-estate-and-income-tax-questions.html

Despite case law supporting possible deductions, IRS Chief Counsel Memorandum 1998-012 explains that such a deduction is allowed only when the property has been converted to an income-producing property. The memorandum is not authoritative; however, it does provide insight into the IRS’s position and highlights an area of potential scrutiny.

[hogebdg]

The house has been empty and no one else has lived in it. It does not generate income

[Opus 17]

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@hogebdg wrote:

The house has been empty and no one else has lived in it. It does not generate income

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I have not specifically researched the question of whether you can treat an inherited home as investment property and deduct a loss (and yes, this is not "technically" inherited, but the point is the same.). But I would point out that generally when it comes to laws and courts, if there are court cases that decide one way (case law), and a lawyer's opinion that goes the other way, future courts will usually follow previous court decisions unless there has been a change in the laws or a major change in legal thinking.  I would also question the principal that it must be income-producing property to deduct a loss, since you can deduct investment losses on many other types of property that don't generate income (such as vacant land, precious metals, and so on).  Nevertheless, if you have a substantial loss you want to deduct, you should consult your own tax specialist and pay for a professional opinion that they will defend for you if you are audited.

In general answer to your question:

a. If you want to deduct the loss as investment property, you must report the sale.

b. If you received a 1099-S, you must report the sale, regardless of whether you want to report a loss or treat it as a non-deductible loss on personal property. 

c. If you did not receive a 1099-S and you want to treat the loss as a non-deductible personal property, then you don't have to include it on your tax return.  

[M-MTax]

I would also question the principal that it must be income-producing property to deduct a loss

Yet that was the advice in the memorandum from the IRS Office of Chief Counsel. MEMO 

[Opus 17]

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@M-MTax wrote:

I would also question the principal that it must be income-producing property to deduct a loss

Yet that was the advice in the memorandum from the IRS Office of Chief Counsel. MEMO 

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"Despite case law supporting possible deductions, IRS Chief Counsel Memorandum 1998-012 explains"

I acknowledge the existence of the memo, but as noted, case law creates precedent that other courts usually follow, and courts are more likely to follow prior case law than attorney opinions, unless the attorney opinion is so good that it convinces the new court that the old courts were all wrong (and convinces the appeals court that the lower court was not wrong to discard precedent.)  This is possible, but uncommon.  

[M-MTax]

courts are more likely to follow prior case law than attorney opinions

     Except the memo is from the IRS Chief Counsel's office which represents the thinking of the IRS on the subject. It carries a LOT more weight than any random attorney's opinion. 

     The courts that have jurisdiction over federal income tax cases are federal courts and those are limited to the tax courts, the court of federal claims, and the federal district courts, federal appellate courts, and Supreme Court. The IRS is mostly free to disagree with and appeal decisions of all but the Supreme Court and appellate courts where certiorari has been denied. So it's a little dangerous to play fast and loose with decisions of lower courts and the reason for that is you're fighting city hall. If the IRS non-acquiesces in a tax court case and you get a notice of deficiency based on a position you took on your return you either need to pay or go to court. You can TRY to argue your position with the IRS but if they don't buy it and you decide to go to court it's going to cost you a few bucks and that could even be more than amount of tax you owe.