Decedent's House sold upon death 1099-S

[DMICPA]

I think I am correct but wanted to run it by you folks.

Widowed Senior citizen has house in His living Trust.
He passes away in Feburary 2011.

Trustee files for Federal I.D. Number for trust. Lists house for sale

House sells in May 2011 for $350,000. Actually lost $50,000 on sale due to high closing costs and $20,000 commission paid.

Trustee receives a 1099-S for 2011 showing sale of house for $350,000. Since is was a big loss, Trustee says no need to file anything.

NOW, I say the Authorities will match that 1099-S and trustee will get a notice or worse and it is not advisable just to ignore this. The tax authorities will assume no basis and figure a gain of $350,000 absent other information.

I think we should file a first and final 1041 showing the sale to match the 1099-S. The loss of $50,000 is non-deductible as it was a personal residence. So, on the Schedule D of the 1041, offset the loss with a non deductible notation and come to zero.

No K-1s as there were no other items. The taxing authorities will at least be able to see the 1099-S and the resultant no tax due.

Does this seem like a prudent action to take?

Bob

[Gretel]

Several things to look at. Yes, this surely requires a 1041 which will show a loss, which is a capital loss. After house was transferred into trust it was no longer a residence. The trust should have a beneficiary who can use this loss on his tax return.

[JG EA]

Thinking aloud here. Would it have been better to just sell the house in the SSN's of the beneficiaries and not have opened the trust EIN at all? Would that be required to open it? No $600 of profit. But because of a transfer of ownership would it have to be done?

[DMICPA]

Decedent House sale

First, the loss upon sale of a personal residence in the Trust does not become a deduction as the character and asset type is still a personal residence and this does not change just because the person died.

I am referring to a SCA 1998-12 IRS office of the Chief Counsel issued a memorandum which stated that the loss on sale of a decedent's personal residence is not deductible.

Second, yes it would have been easier to sell the house using the decedent's social security number but the client has a tax attorney "friend" who applied for the F.I.D. number so by the time I become involved this was a done deal.

[Gretel]

First, the loss upon sale of a personal residence in the Trust does not become a deduction as the character and asset type is still a personal residence and this does not change just because the person died.

I am referring to a SCA 1998-12 IRS office of the Chief Counsel issued a memorandum which stated that the loss on sale of a decedent's personal residence is not deductible

.

This Memorandum refers to Estates. Trusts have different rules. I might be wrong in my earlier statement since what I had in mind was actually a decedent who later sold the house and never used it as personal residence.

Second, yes it would have been easier to sell the house using the decedent's social security number but the client has a tax attorney "friend" who applied for the F.I.D. number so by the time I become involved this was a done deal.

I don't think it's about what is easier but what the trust document says. Maybe residence was never transferred into trust? If it was transferred than there is no choice since the revocable trust by default becomes an irrevocable trust. It also depends on the State laws.

[appelman]

I agree with Gretel's original comment.

A trust is different from the estate. Although I don't know quite how to document it, I believe the house becomes investment property in the hands of the (now irrevocable) trust, so a loss should be allowed.

[DMICPA]

Decedent's home sale

Just because a person dies does not make a home an investment property.

If the home was held long enough in the Trust and there was rental income or substantial intent to rent the house, it could eventually become rental property.

A revocable living trust becomes irrevocable upon death but the character of the personal residence does not change overnight. It was formally a personal residence and absent convincing evidence to convert the property into investment property, it is still a personal residence.

[okie1tax]

Trust sells residence

See Reg 1-121(d)D(11) ??? Not sure I have the correct nomenclature but it is at the end of the Reg. 121


(11) Property acquired from a decedent.--The exclusion
under this section shall apply to property sold by--
(A) the estate of a decedent,
(B) any individual who acquired such property from
the decedent (within the meaning of section 1022), and
(C) a trust which, immediately before the death of
the decedent, was a qualified revocable trust (as
defined in section 645(b)(1)) established by the
decedent, determined by taking into account the ownership
and use by the decedent.

[appelman]

That sounds convincing.

If it's eligible for the gain exclusion, you would conclude that it is still treated as a residence, (I presume that this is your point?) Although it is hard to see just whose residence it is supposed to be once it belongs to an irrevocable trust.

Okie1tax: I haven't been able to find the bits you quote. Can you firm up that reference? It should be 1.121- (where a number follows the hyphen). These only seem to run from 1.121-1 through 1.121-4, and none of them seems to have what you quoted.

[New York Enrolled Agent]

If it's eligible for the gain exclusion, you would conclude that it is still treated as a residence, (I presume that this is your point?) Although it is hard to see just whose residence it is supposed to be once it belongs to an irrevocable trust.

Okie1tax: I haven't been able to find the bits you quote. Can you firm up that reference? It should be 1.121- (where a number follows the hyphen). These only seem to run from 1.121-1 through 1.121-4, and none of them seems to have what you quoted.

I'm not sure if the cite was for the code or a regulation. But here is code section §1.121-d(11):
(11) Property acquired from a decedent
The exclusion under this section shall apply to property sold by--

(A) the estate of a decedent,
(B) any individual who acquired such property from the decedent (within the meaning of section 1022), and
(C) a trust which, immediately before the death of the decedent, was a qualified revocable trust (as defined in section 645(b)(1)) established by the decedent, determined by taking into account the ownership and use by the decedent.

However read this caution about that section.

Caution: Code Sec. 121(d)(11), redesignated as such by Sec. 101(a) of P.L. 108-121, and further redesignated by Sec. 403(ee)(1) of P.L. 109-135, was originally added by Sec. 542(c), P.L. 107-16, EGTRRA. As provided in Sec. 301(a), P.L. 111-312, this amendment will apply as if never enacted, effective for estates of decedents dying, and transfers made, after 12/31/2009.

I believe that there exists an exception for decedents who died in 2010.

[appelman]

Indeed!

I show it as:

"[(11) Repealed. Pub. L. 111–312, title III, § 301(a), Dec. 17, 2010, 124 Stat. 3300]"

So maybe back to the drawing boards!

[Gary2]

Just because a person dies does not make a home an investment property.

If the home was held long enough in the Trust and there was rental income or substantial intent to rent the house, it could eventually become rental property.

A revocable living trust becomes irrevocable upon death but the character of the personal residence does not change overnight. It was formally a personal residence and absent convincing evidence to convert the property into investment property, it is still a personal residence.

If this were simply the estate, then Pub. 559 would disagree. Look under "Sale of decedent's residence" on page 16 (2010 edition; the 2011 isn't on the IRS web site yet).

In this case, I don't think the involvement of the trust changes things, but I'm not sure. The trust was disregarded previously, became a taxable entity at death of the grantor, and the trust's intent in holding the residence is presumably to realize its value.

[okie1tax]

Residence in Trust

Yep, I had gone to an old version of the code apparently. What appelman shows is what the current code shows. Below is what the current Reg has.

http://edocket.access.gpo.gov/cfr_2011/aprqtr/pdf/26cfr1.121-1.pdf

§ 1.121–1 26 CFR Ch. I (4–1–11 Edition)

(Bottom of Page 529)

(3) Ownership—(i) Trusts. If a residence
is owned by a trust, for the period
that a taxpayer is treated under
sections 671 through 679 (relating to the
treatment of grantors and others as
substantial owners) as the owner of the
trust or the portion of the trust that
includes the residence, the taxpayer
will be treated as owning the residence
for purposes of satisfying the 2-year
ownership requirement of section 121,r
and the sale or exchange by the trust
will be treated as if made by the taxpayer.

[Burke]

Second, yes it would have been easier to sell the house using the decedent's social security number but the client has a tax attorney "friend" who applied for the F.I.D. number so by the time I become involved this was a done deal.

The tax attorney did correctly according to the instructions for Trusts, Form 1041, page 4, under Taxpayer Identification Number, top of 3rd column. Note that such an RLT can invoke election under 645 to be treated as part of the estate. The trust document should control. What did it say? Was it merely a conduit to distribute assets, thus avoiding probate? (The usual purpose). Note Special Rule for Certain Revocable Trusts states "Section 645 provides that if both the executor of an estate, and the trustee of a QRT elect the treatment in Section 645, the trust be be treated and taxed as part of the related estate during the election period." Once made, the election is irrevocable.