NASSAUSUFFOLK

Can anyone shed some light on this topic?

I have read that this is a deductible loss but also read that the loss is not deductible.

Here are the facts. They seem pretty simple (and somewhat common)

I have a client whose husband died 2 years ago.

The value of the house that they both lived in at his death was $1,200,000.00.

Wife maintains her 1/2 interest valued at $600,000.00

A trust was created upon the husband’s death that she is the beneficiary of, which transferred $1,000,000.00 of assets to preserve the NYS exemption. (I had nothing to do with this.)

She disclaimed the other 1/2 interest in the house. $600,000.00

She also had allocated $400,000.00 cash to put into a brokerage account.

All the assets of this trust which only include the brokerage account will go to her children when she passes.

In 2015 the house was sold for $1,050,000.00

There is a gain for her 1/2 interest over the original cost when purchased 5 years ago but less than the $250,000.00.

Therefore there is no tax consequence to the wife because of her exclusion.

But the trust has a loss of ($75,000.00)

Value at date of death =$1,200,000.00/2=$600,000.00

Sale price in 2015 = $1,050,000.00/2=$525,000.00

This results in a loss on sale of house. ($75,000.00)

So if she lived in the house until the sale, and the house was not rented, is this a deductible loss that can be used against other capital gains in the trusts brokerage account that the wife may earn over her remaining  life (while the trust continues over her lifetime)

If so and if there is any unused loss carry forward upon her death does the capital loss pass through to the children when the assets get distributed?

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Mark Meyerowitz CPA
MEYEROWITZ & MEYEROWITZ, CPAs
Farmingdale NY
516-379-2770
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It is my understanding that the residence would have to have been converted to an income producing asset in order for the loss to be deductible.  Here's a Chief Counsel Memorandum on the topic in regards to estates. 

https://www.irs.gov/pub/irs-sca/1998-012.pdf

You could make the argument that the property was held for investment by the trust, but the fact that the surviving spouse lived there rent free and that the property was put up for sale upon her death would seem to indicate otherwise. 

Pub 559 - Sale of decedent's residence.   If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent's personal residence and even if you did not rent it out. If, however, the house is not held for business or investment use (for example, if you intend to permit a beneficiary to live in the residence rent-free and then distribute it to the beneficiary to live in), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss is not deductible.                         

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Frank Madigan CPA
FRENDEL, BROWN & WEISSMAN, LLP
New York NY

Original Message:
Sent: 11-28-2016 13:58
From: Mark Meyerowitz
Subject: Loss on sale of principal residence from a trust

Can anyone shed some light on this topic?

I have read that this is a deductible loss but also read that the loss is not deductible.

Here are the facts. They seem pretty simple (and somewhat common)

I have a client whose husband died 2 years ago.

The value of the house that they both lived in at his death was $1,200,000.00.

Wife maintains her 1/2 interest valued at $600,000.00

A trust was created upon the husband’s death that she is the beneficiary of, which transferred $1,000,000.00 of assets to preserve the NYS exemption. (I had nothing to do with this.)

She disclaimed the other 1/2 interest in the house. $600,000.00

She also had allocated $400,000.00 cash to put into a brokerage account.

All the assets of this trust which only include the brokerage account will go to her children when she passes.

In 2015 the house was sold for $1,050,000.00

There is a gain for her 1/2 interest over the original cost when purchased 5 years ago but less than the $250,000.00.

Therefore there is no tax consequence to the wife because of her exclusion.

But the trust has a loss of ($75,000.00)

Value at date of death =$1,200,000.00/2=$600,000.00

Sale price in 2015 = $1,050,000.00/2=$525,000.00

This results in a loss on sale of house. ($75,000.00)

So if she lived in the house until the sale, and the house was not rented, is this a deductible loss that can be used against other capital gains in the trusts brokerage account that the wife may earn over her remaining  life (while the trust continues over her lifetime)

If so and if there is any unused loss carry forward upon her death does the capital loss pass through to the children when the assets get distributed?

------------------------------
Mark Meyerowitz CPA
MEYEROWITZ & MEYEROWITZ, CPAs
Farmingdale NY
516-379-2770
------------------------------