You make the callBy: National Association of Tax Professionals
October 8, 2020

Question: Lylah, Bentley, Westin and Braxton inherited a home upon the death of their grandfather in 2016. The FMV of the property on the date of death was $100,000. Lylah bought out Bentley, Westin and Braxton for $20,000 each in 2016 by obtaining a bank loan. Lylah lived in the home as her principal residence until 2020 when the bank foreclosed on the property. She received a Form 1099-A with a debt outstanding of $45,000 and FMV of $80,000. She is personally liable for the outstanding debt. Can Lylah use the §121 exclusion to report the sale of the home, and what is her sales price?

Answer: Yes, Lylah can use the §121 exclusion since she owned and used the home as her principal residence for a period from 2016-2020. She meets the ownership and use test for two out of the five years before the sale.

Since Lylah is personally liable for the repayment of the debt, her deemed sales price when reporting the sale on the Form 8949, Schedule D is $45,000. Since this loan was recourse debt, the selling price of the home was the lessor of the FMV or the balance of the principal outstanding reported on the Form 1099-A. Her basis in the home is $85,000 ($25,000 + $60,000). Since her basis exceeds the sales price, she has a nondeductible loss on the foreclosure sale of her home.

Estate
Estimated tax
Federal tax research
Forms
Read more
penAbout National Association of Tax Professionals

The National Association of Tax Professionals (NATP) is the largest association dedicated to equipping tax professionals with the resources, connections and education they need to provide the highest level of service to their clients. NATP is comprised of over 23,000 leading tax professionals who believe in a superior standard of ethics and exemplify professional excellence. Members rely on NATP to deliver professional connections, content expertise and advocacy that provides them with the support they need to best serve their clients. The organization welcomes all tax professionals in their quest to continually meet the needs of the public, no matter where they are in their careers.

The NATP headquarters is located in Appleton, WI. To learn more, visit www.natptax.com.

Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.

Additional Articles

Categories