If no one lived in the home after your loved one passed away and if the home was sold reasonably soon after that date, the heirs might benefit from a deductible loss.
|
Accountants Who Come To Us For Guidance David M. Kaufmann, CPA Voice: 720.493.4804 Email: contact2@kaufmann-cpa.com Physical Address: 1466 Adobe Falls Way |
Overview: How is a gain or loss figured?You simply subtract a cost basis from the selling price. If you sell a home for $500,000 and if the cost basis was $600,000 there is a loss of $100,000. If that same house was sold for $650,000, there would be a gain of $50,000. A home of an individual is a personal asset. For personal assets, gains may be taxable, but losses are not deductible. Heads - the IRS wins, and tails - you lose! A home owned in an estate or trust may be an investment asset. Usually, such a home is like a security owned by the estate. The personal representative is obligated to sell the home for the highest price to pay estate debts or to distribute to heirs. This is no different than selling 100 shares of Alphabet, Inc to raise funds for the estate. A home that would otherwise be considered an investment asset of the estate could be considered a personal asset, if a friend or relative was living in the home after the loved one had passed away. What is the cost basis of the home?For an individual, the cost basis is what the individual paid for the home, plus improvements. If the individual purchased the home in 1970 for $100,000 and sold it for $600,000. The gain would be $500,000. Probably $250,000 (joint tax return $500,000) would be tax free [Internal Revenue Code (IRC) Section 121]. For an estate, generally, the cost basis of an inherited asset is the date of death value [IRC Section 1014], plus adjustments. A house, which was purchased for $100,000 and was sold in an estate sale for $600,000 the day after the date of death, would have a cost basis of $600,000. Since the selling price was $600,000 and the cost basis was $600,000, there would be no gain or loss. But, this is not a real world situation, because other items can be added to the cost basis. IRC Section 1014 shows how to avoid paying capital gains tax on inherited property. This works best when the property is sold soon after death. If the property is sold many years after death, there still could be appreciation and capital gains tax. What items can increase the cost basis (and increase a loss)?With a properly worded and timely IRC Section 266 election, you can add operating expenditures, including interest and taxes, to the basis. Operating expenditures could include utilities, snow removal, yard maintenance, minor repairs, etc. Using the previous example, assume that operating costs were $7,000. The cost basis is now $607,000 ($600,000 + $7,000). Many, but not all closing costs can be added to the basis. The largest closing cost that can be added to basis is the commission. In this example, assume that closing costs that can be added to basis are $63,000. The new cost basis is $670,000 ($600,000 + $7,000 + $63,000). The estate has a LOSS of $70,000. In the final year of the estate or trust, this loss may be split between the heirs. The heirs probably expected to pay tax on the inheritance, but instead there might be lower taxes due to the loss. If you have questions about this, do not hesitate to contact us at 1-720-493-4804. We serve clients all over the country. A large portion of my business is preparing tax returns and tax planning for trusts, estates and beneficiaries of trusts and estates. Circular 230 Notice: The information contained here are simplifications of complex subjects. We recommend that you talk to a CPA about this issue. To ensure compliance with requirements imposed by the IRS, we inform you that (i) any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
US Estate Income Tax Return |