sale of property from trust

[0bds]

Residential property (not a rental) was sold from a non-revocable trust following the owner's death. Selling price was less than the date-of-death appraised value. Is this considered a capital loss or otherwise tax deductible?

[Anonymous]

You may have a case to take a deductible loss on the sale of the property (which would offset other taxable income in the estate or trust, or perhaps flow through to the beneficiaries reducing their personal taxes). Fair warning, the IRS and the courts disagree on this issue!

The IRS has taken the position that even a trust or estate cannot take a loss unless it is a rental property or converted to a rental property and then sold. However, this conflicts with some of the instructions they provide regarding capital assets held by trusts and estates. The courts, on the other hand, have held that a trust or estate does not hold personal assets, and thus is allowed to take a loss on the sale of what used to be the decedent’s personal residence as long as no beneficiaries live in the property in the interim. 

[0bds]

Thanks, Hackitoff. Would the loss (if claimed) be considered a capital loss, rather than an operating loss?

Also, can the loss be passed to a beneficiary before the trust is dissolved? (The house was bequeathed to one beneficiary, but the trust must hold off on passing different assets - by trust instructions - to another beneficiary, who is a minor.)

[Anonymous · Accepted solution]

capital loss since the courts have view it as investment property - thus allowing the loss in their view.   the IRS, in your situation - non rental,  regards it as personal property and thus not allowing either a capital or operating loss.   upon termination, and not before,  any unused capital loss carryovers would be distributed pro-rata to the beneficiaries.

see a trust and estate lawyer to see if there is a way to get around the minor being a beneficiary.

part of the answer also lies in the trust document which you should bring if you are going to see a lawyer