J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

29.10 Loss on Residence Acquired by Gift or Inheritance

You may deduct a loss on the sale of a house received as an inheritance or gift if you personally did not use it and offered it for sale or rental immediately or within a few weeks after acquisition.

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Planning Reminder

Inherited Residence

If you inherit a residence in which you do not intend to live, it may be advisable to put it up for rent to allow for an ordinary loss deduction on a later sale. If you merely try to sell, and you finally do so at a loss, you are limited to a capital loss.

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EXAMPLES

1. A couple owned a winter vacation home in Florida. When the husband died, his wife immediately put the house up for sale and never lived in it. It was sold at a loss. The IRS disallowed her capital loss deduction, claiming it was personal and nondeductible. The wife argued that her case was no different from the case of an heir inheriting and selling a home, since at the death of her husband her interest in the property was increased. The Tax Court agreed with her reasoning and allowed the capital loss deduction.

2. A widow inherited a house owned by her late husband and rented out by his estate. Shortly after getting title to the house, she sold it at a loss that she deducted as an ordinary loss. The IRS limited her to a capital loss deduction. The Tax Court agreed. She could ...