Received inheritance from sale of deceased parents' farm. Total amount of sale was less than appraised value of farm at death. Do I need to report for capital gain/loss?

[loisannpike]

Me and my 2 siblings received inheritance from the sale of our deceased parents' farm.  I understand that the inheritance isn't taxable for federal or state (KY) tax but I am concerned as to how it should be reported (if needed).  

[DS30 · Accepted solution]

It depends.

No - If after you inherited the property, you used the property for personal use, then you will not report the loss.(The IRS does not allow a capital loss on the sale of personal use property. This rule applies to the sale of a inherited property that was a personal use property. The TurboTax system will enter a capital loss of zero for this transaction.)

Yes - If no one used the home for personal use before the sale, enter this as an investment in order to claim a capital loss on your tax return. If you have no other capital gains, you will be able to reduce your ordinary income by up to $3,000 of this capital loss in the current year (and any remaining capital loss not used in the current year will be carried over to future years to be used against capital gains (with up to $3,000 used against ordinary losses) each year until the capital loss is all used.

You will each need to report your proportion share of the gain on your individual income tax returns as the sale of a capital asset.

Click this link for further information about reporting the sale of a capital asset

• To enter this transaction in TurboTax, log into your tax return  (for TurboTax Online sign-in, click Here  and click on "Take me to my return") and type "investment income (gains and losses)" in the search bar then select "jump to investment income (gains and losses)". TurboTax will guide you in entering this information (see step 6 below) 

Alternatively, To enter this transaction in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on” (jump to full list or show more income)
4. Scroll down the screen until to come to the section “Investment Income”
5. Choose “Stocks, Mutual Funds, Bonds, Other” and select “start’ (or “update” is you have already worked on this section)
6. The first screen will ask if you sold any investments during the current tax year (This includes any sale of real property held as an investment property so answer “yes” to this question)
7. Since you did not receive a 1099-B, answer “no” to the 1099-B question
8. Choose type of investment you sold - select everything else
9. Some basic information:
1. Description –  Usually the address of the property sold
2. Sales Proceeds – Your proportionate share of the net proceeds from the sale (your portion of 1099-S amount received for the property)
3. Date Sold – Date you sold the property (on 1099-S)
10. Tell us how you acquired the property - inheritance
11. Enter the date inherited
12. Enter the your fair market value - Your proportionate share of the Fair Market Value of the property at the time of inheritance plus any capital improvements since inheriting it 
13. If you had a loss, on the question of "Did you use this property for business or investment?" If the inherited house was not used for any personal use (no family member lived in it or used it between the time of inheritance and the sale), you will answer that this was for investment

Click IRS answers on Gifts and Inheritance for more information from the IRS on the sale of an inherited property.