Can I claim a capital loss on inherited property if it was sold at a loss?

Yes, you can generally claim a capital loss on inherited property if it was sold for less than its tax basis, assuming the sale was an arm’s-length transaction and the property was not used personally.

How Capital Loss on Inherited Property Works

1. Basis of Inherited Property (Step-Up Rule)

When you inherit property, your starting tax basis is usually the fair market value (FMV) on the decedent’s date of death (or the alternate valuation date, if elected by the estate).

• This is commonly called the “step-up (or step-down) in basis”.
• The decedent’s original purchase price is irrelevant to your basis.

If you sell the inherited property for less than this FMV basis, the difference is a capital loss.

2. Holding Period Is Always Long-Term

Inherited property is automatically treated as long-term, regardless of how long you actually held it before selling.

• Even if you sell it days or weeks after inheriting it, the loss is still long-term.

3. Property Must Not Be Personal-Use at Time of Sale

A capital loss is deductible only if the property was held for investment or income-producing purposes.

Losses on personal-use property (such as a primary residence you lived in) are not deductible, even if inherited.

4. How the Loss Is Reported

If deductible:

• Report the sale on Form 8949
• Carry totals to Schedule D (Form 1040)
• Net capital losses can offset:
  
  • Capital gains without limit
  • Ordinary income up to $3,000 per year ($1,500 if MFS)
• Unused losses carry forward indefinitely

Example

• FMV at date of death: $400,000
• Sale price: $360,000
• Selling expenses: $10,000

Capital loss

$400,000 − ($360,000 − $10,000) = $50,000 long-term capital loss

➡ Deductible if the property was held for investment or rental use

Key Situations Where Loss Is NOT Allowed

• Property used as your personal residence
• Sale to a related party (special loss disallowance rules may apply)
• Estate or trust rules override individual reporting

Summary

Yes, you can claim a capital loss on inherited property if:

• The sale price is below the stepped-up FMV basis, and
• The property was not personal-use at the time of sale

No, if it was personal-use property (like a home you lived in).

Source:

• IRC §1014(a)
• IRS Publication 551, Basis of Assets
• IRC §1223(11)
• IRS Publication 544, Sales and Other Dispositions of Assets
• IRC §165(c)
• IRC §1211(b)
• IRS Publication 550, Investment Income and Expenses