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Member
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Last Login: 8/7/2009 12:02:53 PM
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| We are preparing form 1041 for a Decedent's Estate. The return shows a sale of what previously was the deceased individual's principal residence. The property was sold shortly after death and after the 706 was filed. It happens that the property was sold for the same value as what was reported on form 706 except that there were $35,000 of commissions paid on sale. Therefore, there is a loss on sale of approx. $35,000. My question is whether this loss of $35,000 can be reported as investment loss and deducted at $3,000 per year on Sch. D since the property no longer serves as a personal residence (the taxpayer is deceased). The other option is to deduct the $35,000 commission fee as professional fees on form 1041. Of course, the third (undesirable) option is to treat the loss on sale as personal non-deductible loss. I appreciate your help. Mark Kruspodin
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Last Login: 12/7/2007 2:36:28 PM
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| A capital loss on the sale of a decedent’s personal residence (for example, due to selling costs or a market decline since the Form 706 valuation date) should be deductible as a loss on the sale of a capital asset by the estate on Form 1041 subject to the usual capital loss limitation rules as long as the residence is no longer used as a residence after the decedent’s death (Miller, Watkins). Also, a loss on the sale of a residence after an immediate attempt to sell the residence of the decedent upon the decedent’s death is deductible (Campbell, Carnrick). Warning: In spite of the judicial authority mentioned above which allows an income tax deduction for a loss sustained on the sale of a personal residence of a decedent, the IRS does not agree. The Office of the Chief Counsel of the IRS issued a memorandum which concluded that an estate generally may not deduct a loss incurred on the sale of the decedent’s personal residence unless the residence has been converted to an income-producing purpose
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I have done numerous 706's where I used the sales price of a decedent's personal residence as the cost basis. I have always taken the capital loss on the 1041, unless I was able to take the costs of sale on the 706. I have never had the IRS come back and disallow the loss. If the IRS was to disallow the loss in an estate, then I'd think you'd have grounds to argue that the estate should be able to offset any gain with the $250,000 exemption extended to personal residences (or $500,000 depending on the situation). I'd stick to my guns on being able to take the loss.
I think the only real issue is if the house was sold to one of the beneficiaries as settlement of part of the estate. In this case you'd have a related party sale, where the loss would not be allowed.
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I think Richard is correct. If the house were sold by a person prior to death at a loss, the loss would not be deductible.
Also, selling expenses are not deductible (for the 706 or 1041) on the sale of a residence, unless it was necessary to sell the property to enable distributions or pay taxes I believe.
The fact you have not been challenged on the issue sounds like a stroke of good luck, or the dollar amounts weren't significant enough to go after.
Any other commentators?
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Power Member
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Last Login: 3/12/2011 12:58:57 PM
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| I've seen an IRS pronouncement stating that the loss was not deductible. I thought that it was issued by one of the IRS Campuses or Service Centers rather than by the Chief Counsel. I agree with Richard. This would be a capital loss on Form 1041 provided the sale was not made to a related party. The IRS standard is that the house must be sold to settle the estate and that's true 99% of the time. I don't think you could take the commissions etc as professional fees on Form 1041. They are related to the sale of an investment asset. It becomes an investment asset (in my view) as soon as the decedent dies. If this were first to die, and no requirement that the house be sold, you might have a personal (nondeductible) loss. In my experience, the home is only sold by a single decedent.
Mary Kay Foss
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sca 198-012 was issued by the office of chief counsel on 4/7/1998, "generally may not deduct a loss incurred...unless it has been converted"..."if the estate can prove that the property was converted to income producing property..."
Page 16 of the 2009 edition of Publication 559 "if... you intend to realize the value...through sale...is a capital asset held for sale"
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