Sale of Inherited Rental Property - Ordinary Loss?

[tax-can-do]

My mother-in-law passed away in September 2023 and we inherited her 4-flat building (which was titled in the trust). 

1. The building sold on Dec 22, 2023 for $725K, so I will also use that as the basis. Can I depreciate the building from her date of death (on Sept 23) through Dec 22, 2023 (3 months)? 
2. Because of closing costs, there will be a loss of approx. $50K. Would this be a Sect 1250 loss (ordinary)?
3. All proceeds will be distributed from the trust bank accounts in early Feb 2024.

[Anonymous_]

You (or the trust after it became irrevocable) can take a depreciation deduction for the time period after the death of your mother-in-law through the date of the sale (real estate is an exception to disallowing depreciation for personal property held one year or less).

The loss would be a Section 1231 loss (ordinary) and note that the depreciation deduction you take will be immediately recaptured but the Section 1250 recapture would be absorbed by the loss on the sale.

[tax-can-do]

Great, thanks very much. So the sale would be a section 1231 loss and not a section 1250 loss?

Also, when I applied for the federal ID number, I did not  indicate a section 645 election. Can I still file this 1041 on a fiscal year basis? I’m asking because I would like to take the ordinary loss in 2024 instead of 2023. 

[Anonymous_]

Section 1231 loss (Section 1250 address recapture).

You stated that the property was sold in December and there is a loss so, presumably, you (as trustee?) will only be distributing corpus and the loss will be reported on the beneficiaries' K-1s (for the 2023 tax year).

In short, you most likely don't need to make a Section 645 election.

[tax-can-do]

OK thanks. Section 1231 Loss makes sense. I am the trustee and also one (of two) of the beneficiaries. Even though the transaction took place in 2023 and the proceeds will be distributed probably by January 10, I would prefer to take the loss in 2024 to offset ordinary income in 2024. My income isn’t too high for 2023, so I would like to wait to take that loss until 2024 if possible. Maybe filing an 8855 would accomplish that?

[Anonymous_]

Yes it would if, indeed, there is an estate. 

[tax-can-do]

There is no estate, because the only asset was a rental building, and that was kept in her trust. So you can’t file a trust on a fiscal year? There has to be an estate connected with it?

[tax-can-do]

Could I just apply for an FEIN for an estate and then file the 1041 using the estate FEIN and make the Section 645 election on the 1041? Would that scenario allow me to file a 1041 on a FY basis?

[Anonymous_]

You do realize that there needs to be an associated estate for that election, right? Also, this particular election is a bit of a pain, anyway, since you need to unwind both. 

Also, the loss on the rental property can be used to offset all other types of income you may have in 2023 and it could even generate an NOL which you could carry forward to the 2024 tax year.

[tax-can-do]

Yes, my understanding is that you have to file an estate tax return in order to combine the trust return into the one 1041 filing. I have the FEIN for the trust. I didn't apply for an estate FEIN because there isn't an estate (as far as I understand the term). Her only asset was this building and that was in her trust.  I can just go with reporting it in 2023 to make things simple. Since the building sold in Dec 2023 and the proceeds will be distributed (in full) in January, does the distribution in January get thrown back into 2023 because of the 65-day rule?

[Anonymous_ · Accepted solution]

Yes, you can make a Section 663(b) election in TurboTax (i.e., electing the 65-day rule).