Sale of inherited property

[gwhite822]

Hello I have a client that inherited a house from her dad in 2020 appraisal was for 40000 and sold it in 2021 for 18000 cash sale didn't receive any tax documents what form should I use and would this be considered a loss or just a wash. Thanks 

[PATAX]

I believe it goes on Schedule D. The cost basis is the fair market value on the date of death of the father. Then figure out the net sales price. The difference between the two is the loss and it goes on Schedule D. I think I am correct,  but this is just my opinion.

[jeffmcpa2010]

Schedule D. If there was an actual appraisal from a certified appraiser, I might accept the appraisal value as her basis, and take the Capital Loss. 

If the appraisal was "County Tax Records" or a "Brokers Price Opinion" I would probably talk to the client about spending a few hundred bucks on a certified appraisal.

I would also want to have some conversation about why the property sold for less than half the appraisal, (IE was there any partial gift involved if sold to a relative or close friend).  

That's just me, I'm pretty conservative about sticking my neck out for a client, and we are not seeing 50% loss of value of real estate in the current market around my area.

The holding period begins when the father acquired the property, not when it came to her.

[Accountant-Man]

Was the house a rental, a personal residence of the owner, or an investment property? 

Your answer determines the treatment. 

[PATAX]

Good point there accountant man. In my answer obviously I was assuming that it was the father's primary personal residence. Correction: Bob's comment below is correct. It is the daughters usage that is pertinent, i.e. If the daughter did not rent or live in the property, then the sale would be as I described above, i.e  it would be investment property, which is usually the scenario that I have encountered. Just my opinion.

[PATAX]

@jeffmcpa2010 based on the figures provided it appears the house is in a depressed area, and maybe that is why the buyer paid cash for the house as she indicated. Many times these cash buyers in depressed areas are Real Estate Investors or landlords( some may use the less pleasant term "slumlords").. maybe that is why the cash paid for the house is much less than the fair market value . Just my opinion.

[TaxGuyBill]

I agree that something seems wrong or suspicious about those numbers.

If you were told it was worth $40,000, it does not make sense to sell it for $18,000.  While a slightly lower cost would be a good reason for a quick sale, there is something wrong with that large of a difference.

Was it sold to a related party?  Are there any other circumstances involved about why it was sold for WAY less than the appraisal?

[jeffmcpa2010]

PATAX

As to the low sales price, I was not trying to say that I wouldn't want to proceed with reporting the loss. I just want to acquire enough good documentation in my file as to why the FMV was 40K in 2020 and 18K in 2021, or what decisions made the seller willing to take a lesser offer. I was more trying to emphasize the documentation side, that arguing about the loss. Probably didn't make that clear enough.

[BobKamman]

It doesn't matter if it was the father's primary residence.  What matters is whether the daughter lived in it after his death -- and maybe some of her friends came over and helped trash it, after the appraisal.  

[PATAX]

Thanks Bob. I have made a correction to my answer above.

[jofijohnjoseph]

The holding period begins upon the father's death and transfer to the daughter, no?  This is what step up basis is all about ...

[jeffmcpa2010]

Yes The Basis step's up as of the fathers death.

No the Holding Period DOES NOT begin with the fathers date of death.

The beneficiary does NOT need to hold the property for a year and a day to get long term treatment. For long term capital gain purposes the father's ownership, and any time an Estate owned it are combined with the beneficiaries time of ownership to determine long-term or short -term.

Example :Father owned the property for 10 years. Beneficiary sold the property 3 months after receiving it due to Fathers death. Sale would be a Long-Term sale.

Of Course, in this case with a loss, the holding period, as a practical matter, makes minimal difference.