Meg owns a personal residence that she inherited from her mother five years ago. For estate tax purposes, the house was valued at $625,000. (Her mother's adjusted basis was $400,000.) Meg has been offered $500,000 for the inherited house.
Meg also owns another house that she purchased in a resort community. She wants to sell the inherited house and move to the resort community. Her brother advises Meg that losses on the sale of personal use assets are not deductible but that losses on the sale of rental property are deductible. He suggests that she rent the inherited house to the prospective buyer, with the option to buy it for $500,000 at the end of the one-year rental period. By doing so, she will be able to claim a deduction for the loss. The loss on the sale would be $125,000, reduced by the amount of depreciation deducted on the rental house. If necessary, Meg's brother can arrange for an appraisal to reflect that the house is currently worth $625,000.
Meg follows her brother's advice and takes a deduction for the loss when she sells the house in one year. Has Meg acted appropriately? Explain.

  • CreatedMay 25, 2015
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