Loss on a Sale of a Home in a Trust

[trust812]

My father passed away in September 2024. His house was appraised for $450,000. We are in a down market now in Florida. Houses in the area on his street are now going for $390,000. If in 2025 I sold it for $390,000 and let’s say after expenses like paying a real estate agent the amount netted and distributed to the 4 Beneficiaries was $375,000 divided equally by 4 can the $75,000 (divided by 4) loss also be distributed on their 2025 taxes? Thanks!

[Opus 17]

First, it needs to be an appraisal that reflects the market value on the date he died.

Second, you would distribute the loss regardless.  The real question is, is it a deductible loss to the beneficiaries.

Most experts on this board would say that as long as a particular beneficiary did not have any personal use of the property after he died, they can report the sale as investment property and claim a capital loss against any capital gains.  Anyone who has personal use of the property can't deduct the loss, because losses on personal property are not deductible.  

[M-MTax]

In another post, you indicated that the property was being rented out.

If that's so, then any net loss on the sale of that rental property to an unrelated third party would be an ordinary loss that would be distributed to the beneficiaries as such.

@trust812 

[trust812]

It’s not being rented out yet. I am considering it. I changed my post to be more clear to say “if it is rented out”. Thanks for bringing this to my attention and your answer to my question!

[Opus 17]

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@trust812 wrote:

It’s not being rented out yet. I am considering it. I changed my post to be more clear to say “if it is rented out”. Thanks for bringing this to my attention and your answer to my question!

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If you just sell, you need to give each beneficiary a statement of the FMV and the sales proceeds, which might show a loss.  (If it's a trust, I suppose that would be a K-1.)  Whether or not the beneficiary can deduct the loss depends on whether the beneficiary uses the property personally or treats it as an investment.  How it was used by the previous owner is irrelevant.

For example, suppose beneficiaries Amy, Bob, and Charlie never used the house for personal reasons after the owner's death, but beneficiary Donna moved into the home for 3 months while her home was being remodeled.  Amy, Bob and Charlie can treat the sale as investment property and deduct the loss on their tax return (capital loss, subject to the $3000 rule), but Donna can't deduct the loss because she used the property for personal use and you can't deduct a loss on personal property. (But, living in the house while you are fixing it up for sale, if that is the only reason you are living in the house, does not have to be considered personal use.)

It doesn't matter if the house was a rental before.  What matters is whether the beneficiaries used the house for personal purposes after the date of the owner's death and before the date of the sale.  

If you turn the house into a rental now, instead of selling it, you have some kind of real estate partnership where the profits from the rental get split up and reported as income by the 4 beneficiaries (who are now partners in a new venture).  I can't tell you anything intelligible about how to handle that on a tax return, except that the basis of depreciation when placed in service as a rental is the fair market value on the date it is placed in service, or the cost basis, whichever is less.  So there is no "loss" if you turn it into a rental.

If you do turn this into a rental, you should see a professional, because in addition to the tax return question, you need to think about how you will handle expenses, such as if one owner will be the hands on "manager" who fixes leaky toilets and such, does that person get a larger share?