This article offers clear insights into when and how you may be allowed to claim a capital loss on an inherited house, the specific tax rules involved, and what expenses come into play.
Although this article was written by a qualified subject matter expert, it must not be considered financial advice. Consult a licensed local tax advisor before making any financial decisions.
With that in mind, let’s explore this topic further.
Can You Claim a Loss on Inherited Property?
As a general rule, you can claim a loss on inherited property when certain conditions are met.
- The sale was an arms-length, bona fide transaction.
It must have been a legitimate sale where the buyer and seller clearly intended to transfer ownership and acted independently, in good faith, and based on self-interest.
The IRS requires this to keep people from creating artificial losses to lower their taxes. Selling the house to a relative way below market value in an example.
- The house isn’t considered a personal-use property.
If the IRS classifies your inherited house as personal-use property, you generally cannot deduct a loss for tax purposes.
An example would be if you move in, make it your principal residence, and sell it later. A loss would likely be considered personal versus capital.
By contrast, if you rent the house out before selling or sell it without moving in, it’s treated as an investment property, and a capital loss may be deductible.
- Proper calculations to arrive at the loss.
The IRS requires substantiation for all claimed capital losses. A key part of that is showing how you arrived at the loss figure.
That includes properly calculating the property’s adjusted tax basis, which is a two-step process.
- Determine the initial basis. For an inherited house, that’s generally its fair market value when the previous owner died, not what that person originally paid for it.
- Add capital improvements made after inheriting the house and subtract depreciation you claimed if you used it for rental purposes.
Next, calculate net sale proceeds (the sale price minus allowable expenses). When the adjusted basis is higher, the difference is your net capital loss.
Example: A $250,000 starting basis plus $50,000 improvements equals a $300,000 adjusted basis. Net sale proceeds of $270,000 ($280,000 sale price minus $10,000 expenses) result in a $30,000 capital loss.
You’ll need to report the sale on your income tax return to claim the loss. Specifically, you must fill out Form 8949 and Schedule D to detail the sale and calculate and summarize your loss.
Then, on your individual return (Form 1040), you’ll report the full amount or the maximum allowable deduction, whichever is less.
Note that the IRS limits how much you can deduct against your ordinary income in a single year to $3,000 ($1,500 if married filing separately).
So, continuing the example above, you’d include $3,000 on Form 1040. Then, you’d carry the remaining $27,000 forward (assuming you have no capital gains to offset) to future years until it is fully used.
Remember, tax laws can be complex and subject to change. So, it’s wise to get expert advice to confirm and navigate the rules, particularly those that prevent you from taking a loss.
What Expenses Can You Deduct When Selling an Inherited Home?
When selling your parents’ home or another inherited house, you can claim direct selling and capital improvement expenses.
Be sure to have proof and keep those records to help you substantiate the claim if needed.
Note that these expenses don’t reduce your income as a direct deduction. They reduce the amount realized from the sale or increase the adjusted tax basis of the house.
This adjustment can, in turn, increase the amount you can deduct as a loss on the sale of the inherited house.
Examples of these expenses include:
- Real estate commissions: You can deduct the full commission if you hire a real estate agent or broker, as this amount directly reduces the sale proceeds you receive.
- Legal fees: Title search, contract review, and closing fees are included in this category. Treatment of these expenses as allowable is consistent for selling a house during probate or before or after probate proceedings.
- Advertising costs: An example of these would be marketing costs you incurred, such as print ads, online listings, and professional listing photos.
- Title insurance: A typical closing expense, this protects against issues like undiscovered liens when getting an inheritance of real estate.
- Transfer taxes: These state and local taxes on the transfer of property ownership are typically calculated based on the property’s value.
- Home improvements: This expense is for improvements that add to the home’s value or useful life, not ordinary repairs. An example would be replacing old plumbing or wiring after you inherited your grandmother’s house or an older home with outdated systems.
If you’ve inherited a house that needs work, keep in mind that costs for routine repairs to prepare the property for sale are generally not deductible.
Here’s why: The IRS views these expenses as maintenance that helps get the home in good condition without significantly improving it. So, they don’t typically qualify for deductions.
What’s deductible if you’re selling an inherited house as is? As improvement expenses don’t apply, you would deduct those that are directly related to the sale.
What if you inherited a hoarder house and paid for clutter removal and deep cleaning to make the property safe and habitable?
Expenses for cleaning out a hoarder house often fall into a gray area. So, the short answer is: it depends on the circumstances.
As with confirming acceptable instances for claiming a loss when reporting the sale of an inherited house, a tax advisor’s expertise is crucial in pinpointing expenses to deduct.
They can help you avoid costly mistakes — ones that may inadvertently trigger issues leading to capital gains tax on the sale of your deceased parents’ home instead of an expected loss.
If faced with a gain-versus-loss scenario, an expert can also guide you through strategies to potentially avoid paying capital gains tax on inherited property.
What Is the Easiest Way to Sell an Inherited House?
Selling to a company that purchases inherited properties for cash is your easiest solution.
This option comes with several equally appealing advantages:
- Ready cash: Cash in hand eliminates financing waits and setbacks. You get immediate liquidity instead.
- Speedy closing: Instead of waiting weeks, you can close in days. That makes investor cash buyers a beneficial option when you need to sell your probate house fast.
- Streamlined process: Conventional home sales can be paperwork-heavy. But cash sales usually involve fewer documents, reducing the administrative burden for sellers.
- As-is purchases: You don’t need to spend time or money on repairs or cleanup if you inherit a fixer-upper or an excessively cluttered home. These investors buy houses as-is.
- No commission expense: By selling directly to a house buying company, you won’t have to give up a percentage of your proceeds to pay a real estate agent.
- Closing cost savings: These buyers often cover settlement costs. That means you retain more money from the sale.
As choosing the right cash buyer is crucial, our website has vetted and approved companies to ensure you’re working with reputable professionals.
To explore your options, get cash offers from multiple local firms. Then, compare and choose the best one for your unique needs.
To learn about different selling methods, read our guide to selling an inherited house. It’s a comprehensive expert resource for navigating a property sale.
