Lien on Estate Property

[paulcpa]

The mother of a client died seven years ago. A child of the decedent lived in the home since that time. Now the home was sold and a Form 1041 must be filed for the gain of the home over basis seven years ago. It was discovered that the city had a lien on the property that had to be satisfied upon sale of the home. I can't find specifically if the lien is a selling expense, basis adjustment, or neither. Can anyone help?

[TAX4US]

I think maybe we need to know what the lien was for?

[ATSMAN]

My first question is if the city had a recorded lien on the property HOW did the lawyer or escrow company close the sale?

Who purchased the property. A family member.

The purchased will have to deal with their Title Insurance company to pay that off because it is a defective title. The title insurance company will come after the seller (The Estate) for their costs etc. So I would recommend the Executor better talk to a lawyer and keep the estate open until this matter is settled.

Right now I have an estate open for three years because of a dispute on the property that is hung up in the court system. Each year I file a 1041!

[Burke]

OP states the lien was paid off at the time of sale. It would have been taken out of the proceeds (the usual process) or the sale couldn't close. In my experience most city/county liens are for back taxes, but it could have been something else as well, like an unpaid assessment, which would add to basis. It is not a selling expense. Was this the only asset in the probate estate? Who was the property passed to under the will? Or by operation of law if no will?

The sale is reported by the heirs to the property in proportion to their share of ownership. I don't believe a 1041 is appropriate in this case unless there are other facts we don't know about, like was it left to the estate per the will, and was it being treated as rental property? If the lien is for back taxes (see the closing documents - HUD-1, etc), the heirs will deduct their share on their own returns, Sche A. How have the taxes been paid since the date of death? I am assuming no 1041's have been filed since the death of the owner?

[paulcpa]

The asset was the only asset in the estate. At the time of mother's death seven years ago there was no mortgage and the house was transferred by will to her five children; however, the title was "the estate of mother." Also by will, one of her children, who is disabled, was allowed to live in the house for up to 10 years. This child paid for all maintenance of the house (taxes, insurance, utilities and minor repairs). At the end of year seven the disabled child moved out and the house was sold. Upon sale it was discovered that there was a lien on the house. The city said it was for a low interest loan for low income citizens offered at the time (1988) but the loan was not repaid. The lien/loan was paid with the sale proceeds at closing. No 1041s were filed previously because there was no income from the estate. A 1041 will be filed this year to report the capital gain on the house over the last seven years.

[Burke]

Thank you for the additional details. There is no deduction for the lien since it was essentially a mortgage. If the house passed via the will to her 5 children, with the stated provision that the one child could live there for 10 years, then I am not sure why the title said "estate of the mother." However, be that as it may, reporting it on the 1041 with the proceeds being distributed to the heirs will accomplish the same end result as the 5 heirs reporting their share themselves. They will get a K-1 with their pro-rated portion to report on their 1040 for the year of sale. Somebody has to be paid to do this return, which seems unnecessary to me, and there is nowhere for that expense to come from except from the proceeds. Are they being held in a bank account attributable to the estate? They will also have to apply for an Estate EIN which is another transaction. Also, there may be some pro-rated taxes to account for on the closing document. Any taxes paid by the child who lived there that are refunded by the locality should go to her.

[paulcpa]

Thanks for the help. The attorney for the estate applied for the estate EIN and a small amount of the proceeds are being held back for final expenses.