1041 - Sale of the House

[thetaxman2200]

Hello - I have a client who is an executor of her mothers estate. She(mother) passed way in April 2011 - The estate has no income per interest or stocks or dividends, etc. The only thing that has happened was the sale of the residence in December of 2011 - had a roughly a 23,000 gain on the sale of the home. The expenses for the funeral and attorney fee's and ETC was taken from the balance left over from selling the home. Question do I need to complete the 1041 for federal and the State of PA - remaining cash going to two heirs.

Thanks

[New York Enrolled Agent]

Hello - I have a client who is an executor of her mothers estate. She(mother) passed way in April 2011 - The estate has no income per interest or stocks or dividends, etc. The only thing that has happened was the sale of the residence in December of 2011 - had a roughly a 23,000 gain on the sale of the home. The expenses for the funeral and attorney fee's and ETC was taken from the balance left over from selling the home. Question do I need to complete the 1041 for federal and the State of PA - remaining cash going to two heirs.

§6012 contains the rule for who is required to file a tax return.

Here is §6012(a)(3):
(3) Every estate the gross income of which for the taxable year is $600 or more;

The use of the proceeds from the sale is not a factor to determine if a return must be filed. Based on what you wrote, the estate is required to file.

[thetaxman2200]

1041 house sale

It is my understanding the the gains on the home - even in estate is tax exempt if under $250K - that correct?

Thanks

[Gary2]

Hello - I have a client who is an executor of her mothers estate. She(mother) passed way in April 2011 - The estate has no income per interest or stocks or dividends, etc. The only thing that has happened was the sale of the residence in December of 2011 - had a roughly a 23,000 gain on the sale of the home. The expenses for the funeral and attorney fee's and ETC was taken from the balance left over from selling the home. Question do I need to complete the 1041 for federal and the State of PA - remaining cash going to two heirs.

Wow. The property went up in value by $23,000 between the date of death in April (the evaluation date for stepped-up basis) and December. That's incredible in the current real estate market.

Or are you forgetting that the estate gets the benefit of the stepped up basis, the same as an heir would. There's almost always a small loss, often deductible, when a residence is sold by an estate.

[Gary2]

It is my understanding the the gains on the home - even in estate is tax exempt if under $250K - that correct?

Generally, no. The exception is for 2010, if the special election to not pay estate tax is made. See the instructions for Schedule D for 1041 (not the 1040 Sch. D), under "Sale of Decedent's Main Home."

In the usual case, the estate's basis is the FMV on date of death. Hence if there is any gain, it's due entirely to the period after the owner passed away, and thus makes sense that you can't use the decedent's exclusion.

[DaveO]

Gary2 is correct, I rarely ever see a gain. Don't forget to factor in the costs to prep the home for sale and any closing costs or RE commissions paid.

If there is a loss you need to complete the 1041 to distribute it out to the benes.

[thetaxman2200]

Thanks

Great info - I appreciate the answers - I did forget the step up basis of the home. I do want to make one note however - there are no instructions on IRS web site for 2011 schedule D for 1041's - Just 2010 - I assumed that is what I have to go by....

thanks again.

Studying for the EA after tax season.....

[Burke]

Certain expenses will also be deductible and possibly passed on to the beneficiaries if they exceed income. (Not funeral expenses.) But administration costs, attorney's fees, probate expenses, and so forth. Given the circumstances and time-frame you outline, sounds like most definitely to their advantage to file 1041 to pass through both types of losses. House will be long-term capital loss, others will be taken on Sche A of benes.

[Gretel]

Don't forget the state rules which are different in every state and rule if a former residence actually transferred into the estate or if it is still treated as personal residence.

[DMICPA]

Personal Residence Loss

I had this same question on sale of the personal residence in the trust. I understand that the character is the same and no loss on the sale of a personal residence is allowed. Most likely the home was in a revocable living trust and when the owner died, the trust became irrevocable but the character of the property stayed the same. The home does not automatically become investment property overnight, especially when there is no action taken to rent it out or convert to investment property.

What about the costs of maintaining the home while it was for sale? For instance, there were utilities, insurance, upkeep. Are these subject to the 2% to the beneficiary?

[appelman]

How do you convert to investment property?

The home does not automatically become investment property overnight, especially when there is no action taken to rent it out or convert to investment property.

It seems to me that if the property is neither rented out nor used as a residence, it is de facto investment property. Since a trust cannot reside in the property, if the property has been transferred to an irrevocable trust, and the trust does not hold it out for rent, there is a very good case for treating it as investment property.

[DMICPA]

Investment Property

These are good questions. My concern on a sale of a personal residence being
a non-deductible loss is because in almost every situation in my 30+ years, the house acquired from a decedent is going to sell at a loss if the step up in basis applies. The loss is usually the escrow selling costs and commission.

What if grandma is living and puts the home (which is in a revocable trust) on the market and escrow closes within two weeks of her death? Is this a loss on investment property? Oh wait, suppose it was six weeks after she passed away, now is it investment property? At what point does this become investment property?

What about her 1959 American Motors Rambler? It gets a step up also and suppose it too is sold at a loss, is this now investment property? Same with the old peddle sewing machine, is this now investment property? hmmmmm.

When I handled house sale situations in the past, I consulted with two different tax attorneys and they both told me the house sale is not investment property unless there was convincing evidence to convert it to investment property and that would involve the passing of time between the death and the sale and rental income wouldn't hurt either..

I imagine myself sitting across the desk of an IRS agent trying to explain how in the world the personal residence changed character and therefore the beneficiary gets a tax deduction.

Absent some revenue ruling or case, I am not able to take the investment property position
Also, if it turns out to be a loss of $50,000, doesn't the beneficiary only get $3,000? What happens to the balance of the loss? Does it carryover to the beneficiary?

just wondering.

[Gary2]

What if grandma is living and puts the home (which is in a revocable trust) on the market and escrow closes within two weeks of her death? Is this a loss on investment property? Oh wait, suppose it was six weeks after she passed away, now is it investment property? At what point does this become investment property?

Do you deny the stepped up basis because the closing was only two weeks after death?

I suggest starting with Pub 559, under Sale of Decedent's Residence. Also, ask yourself why the change of character could be immediate on a sale or gift but not when title passes due to death?

[Gene V]

Also, if it turns out to be a loss of $50,000, doesn't the beneficiary only get $3,000? What happens to the balance of the loss? Does it carryover to the beneficiary?

just wondering.

Yes, on the final year K-1, the $50,000 will show on line 11 and the beneficiary will get
$3,000 for the year and the rest will be carry-over.

[Burke]

I am in the process of amending a 1040 for 2010 because a K-1 capital loss was not taken into consideration on the individual return. The TP had no tax liability as he had no taxable income after deductions and before exemptions, so technically, he did not "need" the loss for 2010. However, it would have carried over to 2011 and available to offset income in the following year, had the 1040 been done properly.