Loss On Sale Of Inherited Property

Question: Can a tax deduction be taken on inherited real property be sold as a loss?

Analysis: In most cases, what happens is the parents pass away leaving their primary residence to their children. The value of the property is then stepped up to market value (based on an appraisal) at date of death. Because of the closing costs, the sale of the property usually results on a loss upon sale.

In Miller vs. Comm. TC Memo 1967-44 Pauline Miller's husband Fred purchased a property located in Riviera Beach, Florida (they resided in Ohio). When Fred died on July 30, 1959 Pauline became sole owner of the property.

The court ruled at the moment of her husband's death, Mrs. Miller had inherited the property. This fact coupled with her decision immediately subsequent to her husband's death converted the tax status of the property from that of a personal residence to that of a capital asset involved in a transaction entered into for profit Accordingly any loss sustained upon sale would be tax deductible.

Another interesting case vs. Watkins vs. Comm. TC Memo 1973-167. Here Eunice Watkins inherited her deceased husband's interest in a home he previously occupied with his first wife. The court ruled that petitioner's sale of the residence constituted a transaction entered into for profit, and that the petitioner's long term capital loss sustained upon sale is deductible under section 165(c)2).

Subsequent to these to case, the Internal Revenue Service's Chief Counsel's Office says in SCA 1998-012 that no loss can be claimed from the sale of a decedent's personal residence unless the property has been converted to an income producing property (such as a rental).

Conclusion: The release of Chief Counsel's decision in 1998 effectively over rules the two previous cases cited above that predates this ruling.