Trust Sale of Decedent's Residence

[S T]

In Trust - Decedent - personal Residence FMV at DOD $147,800

House was listed at $ 149,900 - ultimately sold to a beneficiary's daughter and husband for $ 138,000

Are there related party rules that have to be acknowledged, the buyer was not a beneficiary? however was related to a beneficiary.

Sale Price $ 138,000
Commissions - closing costs $ 3,289
Seller - Trust Paid Title 4 877
Seller Paid Buyers Closing Costs $ 4,140

Can Trust report loss of $ 12, 306 in costs and loss of FMV asset of $ 9,800 pass through on K-1 to 3 beneficiaries?

Thanks

Sandy

[Gretel]

Maybe this helps

https://www.law.cornell.edu/uscode/text/26/267

[ATSMAN]

In Trust - Decedent - personal Residence FMV at DOD $147,800

House was listed at $ 149,900 - ultimately sold to a beneficiary's daughter and husband for $ 138,000

Are there related party rules that have to be acknowledged, the buyer was not a beneficiary? however was related to a beneficiary.

Sale Price $ 138,000
Commissions - closing costs $ 3,289
Seller - Trust Paid Title 4 877
Seller Paid Buyers Closing Costs $ 4,140

Can Trust report loss of $ 12, 306 in costs and loss of FMV asset of $ 9,800 pass through on K-1 to 3 beneficiaries?

Thanks

Sandy

I would say no because of the related party transaction rules where if a property is sold less than FMV the losses can not be deducted.

I have done about 6 or 7 such returns with my clients where the house was sold to a relative after death and in case it was less than FMV!

[Burke]

In Trust - Are there related party rules that have to be acknowledged, the buyer was not a beneficiary? however was related to a beneficiary.
Sandy

Hmm.....note that the link to law.Cornell.edu says related means in the following manner:

1) Between a fiduciary and a beneficiary of such trust;
2) An individual and.....lineal descendants;

It does not appear your scenario fits either, if property was owned by the trust. However, you may wish to question the FMV. Was it for sale to the general public before the daughter of the fiduciary bought it? How long was it on the market?

[S T]

Thanks

House was listed for approximately 3 months before selling price was reduced and sold to son-in-law of one of the beneficiaries.

Sandy

[Burke]

Then that was probably the Fair Market Value at DOD. But the trust could deduct the selling costs, IMO. As a general rule, to me -- when the seller pays buyer's closing costs, that effectively reduces the sale price. Was that necessary to effect a sale? We used to see a lot of this in order to get more money from the bank on a mortgage. I would have a tendency to eliminate that as an "expense."

[S T]

Thanks for prior replies!

New scenario on another Trust acquiring decedent's personal residence.

If one of the beneficiaries purchases the decedent's resident through the Trust, then it would be a related party and no losses or expenses would be allowed for the sale to the beneficiary. The beneficiary happens to be a daughter of the decedent, and sister of the Trustee.

I would report as no loss - there would not be a gain ?? as the FMV at DOD was more than the sold price to the beneficiary.

This transaction was about 8 months, and the property was never listed with a real estate agent, however, we do have Appraisals/comp at close to DOD.

Sandy

[Burke]

If I am reading this post correctly, residence WAS sold to a beneficiary of the trust, so no loss allowed. You say FMV at DOD was more than sale price, so that would be a non-deductible loss, not a gain. It doesn't matter what relationship is to the Trustee.

[S T]

Yes you read it correctly!
Beneficiary purchased the decedent' personal residence after it was transferred to Trust

Thanks

Sandy

[Roland Slugg]

Unless the house was first converted to income producing property ... i.e. rental property ... and then sold, the loss is not deductible. Based on the facts given in the OP in this case, that was not the case. The house was listed right after the owner died and sold about three months later. Loss not deductible.

Here's a link to an IRS memo from the Office of Chief Counsel on point. https://www.irs.gov/pub/irs-sca/1998-012.pdf

[Gene V]

This is from Publication 559 page 17

Sale of decedent's residence. If the estate
is the legal owner of a decedent's residence
and the personal representative sells it in
the course of administration, the tax treatment
of gain or loss depends on how the estate holds
or uses the former residence. For example, if,
as the personal representative, you intend to realize
the value of the house through sale, the
residence is a capital asset held for investment
and gain or loss is capital gain or loss (which
may be deductible). This is the case even
though it was the decedent's personal residence
and even if you did not rent it out. If, however,
the house is not held for business or investment
use (for example, if you intend to
permit a beneficiary to live in the residence
rent-free and then distribute it to the beneficiary
to live in), and you later decide to sell the residence
without first converting it to business or
investment use, any gain is capital gain, but a
loss is not deductible.
Holding period. An estate (or other recipient

[S T]

Thanks GeneV for posting that reference - it should apply to the first post scenario - as I am not involved in related party rules.

If the estate is the legal owner of a decedent's residence and the personal representative sells it in
the course of administration, the tax treatment of gain or loss depends on how the estate holds
or uses the former residence. For example, if, as the personal representative, you intend to realize
the value of the house through sale, the residence is a capital asset held for investment
and gain or loss is capital gain or loss (which may be deductible). This is the case even
though it was the decedent's personal residence and even if you did not rent it out

This property was transferred to Trust and would meet those requirements.

I believe I have two questions -

Arrive at FMV which was through a Realtor at $ 147,800 - no formal appraisal

Then Burke made mention of not deducting the Seller Assisted Closing Costs as it was a reduction in the Sales Price - so am confused by that statement - as in effect the Realtor reduced their commission so the Seller could then pay the Buyer's closing Costs

Just trying to arrive at a reasonable FMV to report on the Form 1041 - the other closing costs I am fine with.
Of course always have to explain to the client

Would it be reasonable to enter the actual sales price $ 142,310 ( sp of $ 138K + sellers closing cost exp of $4,140) to arrive at the 138,00 sp on 1099S to the Trust - then deduct the commission and other closing costs.

Thanks

Sandy

[Burke]

Arrive at FMV which was through a Realtor at $ 147,800 - no formal appraisal

Then Burke made mention of not deducting the Seller Assisted Closing Costs as it was a reduction in the Sales Price - so am confused by that statement - as in effect the Realtor reduced their commission so the Seller could then pay the Buyer's closing Costs. Just trying to arrive at a reasonable FMV to report on the Form 1041 - the other closing costs I am fine with.
Of course always have to explain to the client. Thanks.Sandy

The difficulty arriving at FMV is the issue here, and I don't know how much responsibility lands on the preparers' shoulders for coming up with a figure. Here is what I do know: Asking price is what you hope for. Realtor's FMV is based on (usually) comps. (What other like homes have sold for in the past year in the same neighborhood.) Normally, I would take the realtor's estimate, which is mostly pretty accurate based on market conditions, since no professional appraisal is available. That said, no two houses are ever alike completely. But there is the nebulous world of selling to a family member, even though it does not fit the prohibited beneficiary rule, at a figure less than that (not too much of a problem, but there were only 3 months between the listing and the sale), then add to that the fact that the trust paid the buyer's closing costs, which gives me heartburn as far as deducting them as an expense. Would the trust have done that for an arms-length buyer? Maybe, if it wanted to dispose of the real estate in a timely fashion to distribute the proceeds. Realtors' commissions are always a negotiable item, and I am assuming there is no kickback to the realtor here (which would be illegal anyway.) So in the long run, you have to come up with something and have the fiduciary sign off on it, with the caveat that it may be looked at askance by the IRS.

[S T]

Thanks Burke for your analysis at arriving at a reasonable FMV and using Selling Costs involved. I at least can explain to the Trustee for them to make a decision.

I so appreciate all of your posts, and in particular the assistance that you lend with Trusts and Estates.

Sandy