Is a realtor's recommended selling price of an inherited property that is based on market comparisons adequate to use as the FMV for IRS purposes?
Also, if the property is subsequently sold at an amount less than the realtor determined FMV, is that a deductible loss on Schedule D?
One other question--The property was located in a different state (Illinois) than my residence. Will a state return need to be filed in Illinois?
I've already tried...
The property has been sold and only the realtor's pricing recommendation has been obtained, though zillow.com data supports the realtor's pricing and is indicative of the declining market value in the community/zip code between the time the price was established and the house sold.
Answers
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The comments about the realtor's valuation and Illinois return are helpful. The Publication 559 comment I do not believe addresses the question. I am a beneficiary and owner of the real estate and not the estate.
Expert
You can use the selling price that is based on market comparisons for FMV.
As far as whether you can take a loss, it depends on the situation. Here's what it says in IRS publication 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."
In answer to whether you should file an Illinois state return: when you sell a property in another state other than the one you live in you would file that other state's return. The exception would be if the proceeds were below the minimum filing requirement amount for Illinois. You will probably receive a form 1099-s showing proceeds from Illinois.
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Unfortunately, the citation from pub 559 seems to be the closest that the IRS has gotten to addressing an issue similar to yours. There have been a number of cases in tax court similar to yours, where this issue has been decided on a case by case basis. The rules mentioned in the citation about personal vs investment property seem to have been the criteria for deciding these cases.
Accepted AnswerAnother issue here is, how long did you hold the property before putting it up for sale?
JK Lasser's "Your Income Tax 2010" advises that
"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".
They have concluded this based on previous cases that were decided in the taxpayer's favor, the circumstances of which were that the house was put up for quick sale and that the property was not used for personal use or was rented. If you did not put it up for sale quickly the property value would decrease while you were "holding it".
So, I would advise you to carefully consider if you meet the criteria I have mentioned. And be advised that you could be questioned on the loss. So be prepared for that, if you decide to take it. If you are questioned, you will need to have supporting data of the FMV and when the property was put up for sale and anything showing that the property wasn't used fro personal use. Has or can your realtor provide you with a comparative market analysis? You should keep records of this and any other market comparison data you have.
Good luck. Hope this helps.
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