Sometimes. Your basis is generally the home's value on the date of death, so a sale for less, after selling costs, can show a loss. The IRS lets you deduct it only if the house was held for investment or rental, not personal use, and net capital losses offset ordinary income up to $3,000 a year.
Families who sell an inherited house for less than it was worth when a parent died often ask whether the shortfall can lower their taxes. The IRS answer turns less on the price than on how the house was held after the death. A house the family kept for personal use produces a loss the IRS ignores. A house the estate or heirs held to sell, or rented out, can produce a loss that counts.
This guide walks through the federal rules as they apply to a Texas inheritance. For where Tarrant, Dallas, Collin and Denton heirs find the date-of-death value and the sale figures, see our DFW guide to documenting a loss on inherited property. Nothing here is tax advice. A CPA should apply these rules to your facts before you file.
Why inherited houses often show a loss on paper
A loss is the amount you realize from the sale minus your basis. For inherited property, IRS Publication 551 says basis is generally the fair market value on the date of death, or on the alternate valuation date if the personal representative elected it. If the estate filed an estate tax return and you received a Schedule A (Form 8971), Publication 551 says certain beneficiaries must use the value reported there.
Texas is a community property state, and Publications 551 and 523 list it by name. When one spouse dies, the full fair market value of the community property generally becomes the basis of the whole property, including the survivor's half, as long as at least half of the community interest is includible in the decedent's gross estate.
The amount realized is the sale price minus selling expenses. Publication 523's worksheet lists sales commissions, advertising, legal fees, loan charges you paid that would normally be the buyer's, and other costs of selling. Because the starting basis is a recent market value, a family that sells close to that value and pays selling costs can end up with an amount realized below basis. Whether that loss is deductible is the next question.
The deciding question: personal use or investment?
Publication 544 states the core rule plainly: a loss from selling property held for personal use is not deductible, except for casualty or theft losses. Publication 523 says the same about a main home sold at a loss. So the question is how the house was held once it passed to the estate or heirs.
Publication 559 addresses the estate's sale of a decedent's residence directly. If the personal representative intends to realize the value of the house through a sale, the house is a capital asset held for investment, and the gain or loss is capital gain or loss, which may be deductible. That holds even though it was the decedent's home and even if it was never rented. But if the house is kept for a beneficiary to live in rent-free and is later sold without first being converted to business or investment use, a gain is taxable and a loss is not deductible.
| How the house was held | Loss treatment | Source |
|---|---|---|
| Estate sells it to realize its value | Capital loss that may be deductible | Pub. 559 |
| Family member lives in it, then it is sold | Not deductible | Pubs. 544, 523 and 559 |
| Rented out and sold as rental property | Section 1231 treatment; a net section 1231 loss is ordinary | Pub. 544 |
| Sold to a sibling, parent, child or other related person | Not deductible | Pub. 544 |
Publication 559 speaks to sales by an estate. When heirs own the house directly and sell it themselves, the same personal-use versus investment question applies, but how your facts fit is a judgment call for your CPA. Keep records that show what you intended: listing dates, offers, and whether anyone lived there.
If the heirs rented the house out
Some families rent out an inherited house while they decide what to do with it. Publication 544 says property held for the production of rents is generally treated as used in a trade or business for section 1231 purposes, and real property must be held longer than a year to qualify. An heir automatically meets that, because Publication 544 treats inherited property as held for more than one year. If your section 1231 transactions for the year net to a loss, Publication 544 says that net loss is ordinary rather than capital.
If an heir first lived in the house and later turned it into a rental, Publication 551 sets a special basis for figuring a loss: start with the smaller of the adjusted basis or the fair market value on the date the use changed, then adjust for the period after the change, including depreciation.
How much loss you can use each year
A deductible capital loss first offsets capital gains. Publication 544 then allows up to $3,000 of net capital loss against ordinary income each year, or $1,500 if you are married and file separately. Anything above that carries over to later years and keeps its long-term or short-term character.
Publication 544's own example shows how it works: a married couple with a $7,000 capital loss and no other capital transactions deducts $3,000 on their joint return and carries the remaining $4,000 to the next year. Because inherited property counts as held for more than one year, a loss on an inherited house is long-term.
Estate sale or heir sale: who claims the loss
Under Estates Code Sec. 101.001, the estate vests in the heirs or devisees at death, but an executor or administrator may still sell the house during administration. Publication 559 says an estate reports its capital sales on Form 8949 and Schedule D (Form 1041), the estate's own income tax return. It adds two rules families should know:
- If the estate ends with an unused capital loss carryover, that carryover passes to the beneficiaries who succeed to the estate's property, and they claim it on their own returns.
- Capital losses and carryovers the decedent had before death can be deducted only on the decedent's final return, not on the estate's return.
The related-party trap
When one sibling buys out the others, the family may assume a loss carries through. Publication 544 says it does not: a loss on a sale between related persons is not deductible. Its list of related persons includes siblings and half siblings, a spouse, parents and grandparents, and children and grandchildren. It also lists an executor and a beneficiary of the estate, unless the sale satisfies a pecuniary bequest. A loss on a sale inside the family is lost, so get advice before pricing a buyout.
Reporting the sale
- Form 1099-S. Publication 544 says the person responsible for closing a real estate sale generally must report it on Form 1099-S and give you a copy showing gross proceeds in box 2.
- Form 8949 and Schedule D. Capital gains and losses from real estate go on these forms. If you had a nondeductible loss on personal-use real estate and received a Form 1099-S, Publication 544 says to report the sale anyway.
- Records to keep. A date-of-death appraisal, any Schedule A (Form 8971), the closing statement, receipts for selling costs, and proof of how the house was used after the death.
Selling an inherited Texas house
Whatever the tax answer, a clean paper trail helps. Cash Home Advisors pays all closing costs and can close in 7–14 days, and you see the full closing statement before you sign, so your CPA gets a clear record of the sale price and costs.
Request a cash offer, see how a sale with us works, or read our page on selling an inherited house in Texas. For property tax and basis questions, see our guide to taxes on inherited property.
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Frequently asked questions
Is a loss on the sale of an inherited house deductible?
It depends on how the house was held. IRS Publication 544 says a loss on property held for personal use is not deductible. Publication 559 says that when an estate sells a decedent's home intending to realize its value, the house is a capital asset held for investment and the loss may be deductible, even if it was never rented.
How much of a capital loss can I deduct in one year?
Publication 544 says capital losses are allowed in full against capital gains, plus up to $3,000 of ordinary income a year ($1,500 if married filing separately). Any unused part carries over to later years and keeps its long-term or short-term character.
Can I deduct a loss if I sell the inherited house to my sister?
No. Publication 544 says a loss on a sale between related persons is not deductible, and its list of related persons includes siblings, parents, children and other family members. It also lists an executor and a beneficiary of an estate, unless the sale satisfies a pecuniary bequest.
Do I still report the sale if the loss is not deductible?
If you received a Form 1099-S for a sale of personal-use real estate at a loss, Publication 544 says to report the transaction on Form 8949 and Schedule D even though the loss is not deductible.
Sources
- IRS Publication 551, Basis of Assets (Inherited Property; Community Property; Property Changed to Business or Rental Use)
- IRS Publication 544, Sales and Other Dispositions of Assets (personal-use property; related persons; section 1231; capital losses)
- IRS Publication 559, Survivors, Executors, and Administrators (sale of decedent's residence; unused loss carryovers)
- IRS Publication 523, Selling Your Home (Home Inherited; selling expenses)
- Texas Estates Code, Chapter 101 (Sec. 101.001 estate vests at death)
General information, not legal or tax advice. Talk to a Texas attorney or CPA about your situation.