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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
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My husbands aunts sold his fathers house when they assumed

Customer Question

My husbands aunts sold his fathers house when they assumed personal representation of his estate, no will. We have since went to court, we did recieve money from the bond company for the monetary part of the estate, but are out around 125,000.00 the approximate value of the house his father lived in, that the aunts sold before the law suit, because the thrid party was unaware that they did not actually own the house, there was no compensation for the home stead. My question is, because they sold the house and were not the owners, can we claim this as a theft on our income taxes, or can we claim our legal fees for this case on our taxes>
Submitted: 3 years ago.
Category: Tax
Expert:  CGCPA replied 3 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

Losses can only be claimed if they were attributed to previously taxed income. Accordingly, there is no loss here since you were never taxed on this. The same holds true for the legal fees. Sorry to have to give you bad news but it is usually better to know the reality than to live in a misunderstanding.

Expert:  BK-CPA replied 3 years ago.

Hello and thank you for your question.

 

It is too early to determine and you may very well have a loss. It sounds like you're going to have to go back to court. If you get a judgement, you may find that the aunts owe you a debt that they may not be able to pay (bad debt equates to a loss for you / potential forgiveness of debt income to the aunts). However, was this not addressed initially, as you seem to have already been to court? Did title insurance apply?

 

BotXXXXX XXXXXne, if you inherit a house you'll have a tax basis in that house equal to its fair market value on the date of the estate generally, and if you lose that house and have a loss that is not compensated for by insurance or otherwise, you'll have a deductible loss (IRC, aka internal revenue code section, 165). An inherited house is generally an investment property until it is sold, used for personal reasons, turned into a rental, etc. Furthermore, legal fees spent on defending/acquiring investment property are deductible generally. See here:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000165----000-.html

 

(a) General rule There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

 

...

 

(c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to-

(1) losses incurred in a trade or business;

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and

(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

 

 

...

 

See also IRC 1014:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00001014----000-.html

 

 

§ 1014. Basis of property acquired from a decedent

How Current is This?

(a) In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be-

(1) the fair market value of the property at the date of the decedent's death,

 

...

...

 

I hope this is helpful. Sorry to the above expert, but I don't agree. You, without a doubt, need someone that can get at your personal facts and circumstances, such as the court records etc. Simply telling you that you do not have a deductible loss or deductible legal fees is not appropriate. Thank you for your question!

Customer: replied 3 years ago.
To make a long story short, the aunts did not notify my husband that his father had died, they had been estranged for some time, when the aunts contacted a lawyer, they informed him that my husband was not his biological child. The Courts had made the aunts acqire a $600,000.00 bond. This was to cover his monetary investments and his homestead property when he died. The judge did rule that the bond company must pay the monetary investments back to my husband, Of course, the lawyer got a 1/3 of that which amounted to almost 100,000.00. The judge also ruled that we could go back and sue the aunts for the market value of the house, but with one being in ohio and the other being in virginia, the cost of taking them to court without a guarantee of winning did not seem wise at the time. A detective investigated, claiming that the whole process was definitely fraud, but the attorney general did not want to persue the case. So my question is actually two, can we claim any of the monies given to the attorney, the $7,000.00 out of our pocket and the $98,000.00 from the return of the investments, and can we claim a theft for the 125,000.00 that the house was worth at the time.
Expert:  BK-CPA replied 3 years ago.

This is a situation where, in practice, I would ask for permission to speak directly to your attorney and obtain any official court records. I would look to determine the true and rightful owner of the home and investments at the time of the estate and proceed accordingly.

 

Your attorney's fees in this case should be deductible under IRC 212:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000212----000-.html

 

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year-

 

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

 

...

 

 

 

As far as your theft loss goes, IRC 165 above would apply.

 

Now for the tricky part. NOL (net operating losses) apply to theft and casualty losses. Let's start with an IRS pub, here (bolding mine):

 

http://www.irs.gov/publications/p17/ch25.html

 

"Net operating loss (NOL). If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have an NOL. You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you have already paid. Or, you can use it to lower your tax in a later year. You do not have to be in business to have an NOL from a casualty or theft loss. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts."

 

The tax code behind the above can be found here, in IRC 172:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000172----000-.html

 

"(ii) Eligible loss For purposes of clause (i), the term "eligible loss" means- (I) in the case of an individual, losses of property arising from fire, storm, shipwreck, or other casualty, or from theft,"

 

...

 

 

Finally, if you can get a 1099C in your aunts' hands, that might be good. 1099C is for forgiveness of debt (ie... you don't sue for the house, but if you at least recognize a debt owed to you by your aunts, you can forgive that debt, solidifying a deductible bad debt loss for you and forgiveness of debt income to your aunts). If you don't claim this as a theft or other loss, the IRS could actually construe this as a gift too, in which case you would have to file a gift tax return (probably just a reportable, and not a taxable, gift, pending you specific facts and circumstances).

 

Does it seem like you have a deductible loss over JustAnswers? Absolutely. While I realize you have spent $ already, I can assure you, it is worth a little more at this point to have a quality tax professional assist you. Schedule an appointment and come with your code sections handy (IRC 212, IRC 165, IRC 1014, and IRC 172 all above).

 

I am very sorry for your loss... Hopefully you are are able to find some resolution.

 

Thank you again for your question too!

 



Edited by BK-CPA on 1/7/2011 at 12:58 PM EST
Customer: replied 3 years ago.
I have to change my payment information and then I will accept your answer, sorry for the delay. I have one more question on this subject, If I am able to claim the homestead as a theft loss, what figure would I be able to use, the aunts say they sold the house for $16,000, the county tax documents have a fair market value of $125,000, and the person it was sold to is currently asking $45,000 for the house and the property.
Expert:  BK-CPA replied 3 years ago.

No problem here and thank you!

 

The fair value of the house at the time of the estate is used. The fair value becomes the beneficiary's new basis in the home for tax purposes (sale price - basis = [taxable] gain/loss, should the beneficiary later sell).

 

The tax value of the home and the fair value per tax documents probably are not accurate... The sale price of the home provides, assuming an arms' length transaction, the fair value of the home at the time it was sold, however, the determination still must be made at the time of the estate (ie... date of death). An appraisal is generally used at the time of the estate to help document that fair value.

 

I do sincerely XXXXX XXXXX the best here. I understand this is probably frustrating...

 

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