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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.
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:
(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:
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!
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:
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):
"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:
"(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!
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...