Inherited House Sale

Given the situation you described, no. No loss can be taken.

Could it be considered an investment asset as no-one lived in it and it wasn't rented? Then capital losses would be allowed.

As presented, the situation doesn't indicate an y attempt at all to rent it out. Even if they produce a paper trail of attempted rental, it wasn't actually "placed into service."

This situation is somewhat unsettled tax law. There are two tax court cases that support the taxpayer treating it as a capital loss. The IRS has not agreed with these cases. There is an IRS Chief Counsel Memorandum that might lead one to conclude the character of the property remains personal use unless the property becomes income producing property.

Personally, I follow the two court cases that treat the disposition as the sale of investment property.

See The Estate of Pauline Miller vs Comm'r, T.C. Memo. 1967-44, 1967 WL

and

H.V. Watkins and Eunice W. Watkins vs Comm'r, 32 T.C.M. 809 (1973) T.C. Memo. 1973-167

Forgot the link to the Chef Counsel Memorandum:

I concur, but was waiting for someone to post the authority. Thank you.

Yeah, I agree, it probably wasn't a rental from the facts presented. But it was not personal either. Then it is a capital asset, and losses are allowed as for stocks, and property tax paid would be investment interest (which is unlike real estate interest in that investment interest is allowed under AMT). Just a thought.

If any of the beneficiaries lived in the house with the decedent at the time of death, I would argue that unless they vacated immediately, those beneficiaries have no loss, while the others who didn't live there could claim the loss under the investment rules (with the TC caveats mentioned in other replies).

The form 1041 would show the loss and distribute it via schedule K-1. Each beneficiary would have to determine whether they could recognize the pass-through loss based on their own facts and circumstances with regard to their relationship to the property.