Estate Income Tax Return Expenses

[peggysioux]

Taxpayer is executor of mother's estate. Mother passed away in 2015 and only asset was residence which had to be repaired prior to sale. Estate was cash poor so executor paid for expenses from 2015 to 2018 when home was sold. Taxpayer did not file any estate income tax returns from 2015 through 2017 thus no election to capitalize expenses. Probate did not begin until 2018 and executor was reimbursed for a portion of his expenses in 2018 through probate. If expenses from 2015 through 2017 were reimbursed in 2018, would those expenses be deductible in 2018 on 1041 estate income tax return or being expenditures took place in previous years and no income in those years, would those deductions be lost? (I think it would be the second choice, but hoping there is some exception being there were almost $15,000 in expenses that will be lost). Unable to make 2018 tax return final (attorney advising me that probate will take another four months)

[Burke]

Those expenses will be accounted for in the calculation of gain/loss on sale in 2018. They are added to basis. If no income in prior years, no return required for those years. So the expenses are not lost. (As they would be if you filed 1041's all those past years with no income and no distributions.)

[peggysioux]

In my research, I found that in order to capitalize carrying costs, a timely election was required on the tax return for which the expenditures took place. Am I missing something?

Thank you for your response.

Peggy Sioux

[peggysioux]

Additional info - the expenses incurred were not improvements to the home, but rather utility expenses, regular landscaping , taxes, etc. Thanks Burke.

[Burke]

Additional info - the expenses incurred were not improvements to the home, but rather utility expenses, regular landscaping , taxes, etc. Thanks Burke.

Okay. I was assuming they were repairs since you said there were some. There is some history of amended returns allowing the capitalization of expenses such as taxes & interest under certain conditions under 1.266. These have to be years in which there was no profit, or tax liability, and there is documentation of action in good faith. And not a closed year for statute of limitations. See also PLR-137244-12. The letter was produced for a partnership, but the rules also apply to estates. Getting a PLR on this would cost more than its worth. But you could try to file the amended years with the election since they are open if you want. See also discussion re: Form 5213. I did see some reference to filing this on an amended return. Have no past experience with this so I cannot guarantee results. Again, would the costs outweigh the benefits? Also, if executor does elect to capitalize past expenses and is successful, they would not be direct deductions on the 1041 in 2018, but added to basis and flow through as capital gain/loss on the K-1. Can't have it both ways.