Q: Long Term Capital Loss for Inherited Property Sold by a Living Trust
My sister and I inherited our mother's condo in CT which was held in a Living Trust. The Trust sold the property and issued a 1099S for the sale. My sister and I each received half of the proceeds. There were no other assets in the Trust, and there was no income generated since the condo was stepped up in value. However, our accountant who is handling the Trust returns (Federal and State) tells me that the losses (selling expenses, seller credit, etc.) are not distributed to the beneficiaries in the final year of the trust because the home was our mother's primary residence. I disagree, and they have agreed to do additional research. My sister's accountant says that the losses should be distributed. Some articles online state that upon death, the property immediately becomes recognized as an investment property and therefore the losses are distributed to the beneficiaries via the K-1s. I have also read that the IRS and courts haven't always been in agreement. Who is right?
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A:
When you inherit property through a living trust, it typically receives a step-up in basis to the fair market value at the time of your mother’s death. This means that any capital gain or loss is based on the difference between the sale price and this stepped-up value. The treatment of losses, however, can be complex.
In your case, because the condo was your mother's primary residence, it may not be treated as an investment property at the time of her death. This could limit the ability to distribute the losses to the beneficiaries on a K-1. The IRS does have specific rules about this, and there have been cases where the courts have ruled differently, so it's understandable that there’s some confusion.
Given that your situation involves nuances in tax law, it’s important that your accountant digs deeper into IRS regulations and relevant case law. Your sister's accountant might be referencing situations where the property was held as an investment, which could be different from your scenario. It’s crucial to ensure that both accountants consider all aspects of the law as it applies to the specific details of your case.
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