| Thanks you two. Riley: My tax research program (Kleinrock) did not show those cases so I Googled general question text and ran into a more recent on-point case in Estate of Pauline Miller v. Com. (1967) but this was all trumped by a Kiplinger site reference to Pub. 559. Therein on pages 16 and 23 I found tax research nirvana! Per the IRS the loss is fully deductible and how to report it when the the estate closed (fiscal year ended in 2009, but a 2008 K-1, but the bene reports in 2009 - year estate ended). It is amazing the level of online confusion that exists on this point ansd that Brookhaven SCA 198-012 "Significant Service Center Advice" was very misleading. Thanks for getting me started.
Blrgcpa: Ah, therein lies the problem. I had difficulty getting past how the personal residence was going to get capital asset treatment in the estate until I thought more about how in most cases the FMV at dod will be the sale price and you basically get a bonus in deducting the closing costs. In this case the estate 1041 preparer (I don't know yet what his qualifications are) simply asked the executor "hey, what do you think the house was worth on dod?" and then he used that $210k FMV and the net sale price a mere 7 months later of $175k to flow thru a cool $35k loss. No cover letter, statement or explanation with the K-1 and I had to get this history from the executor who is asking me "is this going to be allright?" Given the risk-averse nature of these (new) clients, I am going to force them back to the 1041 preparer to discuss the amount that should have been listed on the probate inventory and to be sure they are giving a green light in writing to proceed with claiming this loss.
Yet another case of "if it sounds to good to be true it probably is." This was my first use of this site (I am a small-firm Proseries user) and I appreciate your getting me started down the right path on this research.
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