Distribution of Loss

[Snaggletooth]

A man dies suddenly in a car wreck, with zero estate planning.

He has property subject to a mortgage, and an S corp. At time of death
all of his property was for sale for $400,000. It had been on the market
for years, with no hope of receiving the requested sale price. Best offer
he had received was $229,000, and even this was subject to a $175,000
mortgage.

Lawyer filed estate tax return for State of Tennessee, valuing the land at
$400,000, S Corp stock at $75,000, Retirement accounts at $15,000, and
mortgage at $175,000. Net value $315,000.

Estate for two years files losses. Income from S Corp around $6K annual,
interest expense on the mortgage at $12K and another $1K for estate-type
expenses, legal, accounting, taxes, etc. Losses for two-year period are
appx $13K.

S Corp is owned equally by 2 beneficiaries. Retirement accounts have
been depleted to pay debt service. Real estate may be sold soon for
$275,000, some $125,000 LESS than the valuation at death.

Total losses to corpus are thus $138,000. The estate is closing down, with
everything divided equally among the 2 beneficiaries. Now finally comes the
question:

Can this $138,000 in losses be distributed on a K-1 to the beneficiaries?
Beneficiaries did not receive a K-1 the first year because there was no
distribution. I don't know why these losses can't pass through but I'm
sorta uncomfortable with it.

[S T]

See prior post

Snags, wouldn't this come under some of the same discussion we had a while back. The Estate would generate an NOL or possibly excess deductions. http://www.thetaxbook.com/forums/sho...hlight=estates


Sandy

[erchess]

What am I missing here?

It looks to me as though there would be no loss except for what Snags believes to be the over-valuation of the property. (Or am I more sleepy than I realize?)

If that's correct, then how can Snags sign that the distribution of the loss is true and accurate to the best of his knowledge and belief?

Of course I have no way of knowing the true value of the property at time of death.

[Snaggletooth]

for Erchess

...what you are missing in North Carolina is a practice by Tennessee attorneys to obfuscate our Estate tax threshold. Whereas the federal threshhold has risen by leaps and bounds in recent years, Tennessee has kept their exemption at $500,000.

Here's what's happening on our side of the Smokies: decedents are leaving behind real estate for their lawyers to value. Nearly all of them will grossly understate the value so that the estate will not have to pay on a value over $500,000. To make matters worse, two of them in my area are state legislators, so there is virtually zero chance of the State challenging this value.

Eventually, the heirs will sell the real estate. If I am their tax preparer, I will ask for the estate valuation at time of death. In almost every case, these valuations are grossly understated and the heirs have to report HUGE capital gains to the Federals. When the clients find out what these lawyers have done, they are livid, and occasionally ask me to refile the state valuation and pay up. I am happy to do this if they can provide me with a valuation as of date of death.

This of course is the opposite situation of what we have. However, this may explain how reluctant I am to deviate from the valuation filed with the state, and how I can "sign my name" to such a huge loss.

The big problem is if you don't accept the valuation of these attorneys, it becomes incumbent upon you to provide a different valuation. The last words from Erchess tell the story "I have no way of knowing the true value..." And, of course, I don't either. I think the property is grossly overstated, but most of the properties I have dealt with are grossly understated.

[Snaggletooth]

for Sandy

Yes, Sandy, I haven't forgotten about that post, but my recollection is that a NOL cannot really be carried back (or forward either) with any benefit if there are no profitable years to accommodate it.

The estate (the same one that I asked about a year ago) is in the process of distribution. I'm thinking the "operating" losses should be reported as ordinary (loss). The real estate will not be sold until after the estate is closed, so this grossly overvalued property would be transferred to the heirs at its overvalued basis. If and when the property sells, each beneficiary will have a capital loss to report on their 1040 approaching $50,000.

That part of it is causing me real headaches. Erchess has picked up on it too, and you might wish to read my justification on another post.

Thanks, Sandy, as usual.

Snag

[S T]

We need

Snags

As usual, Natiro, would be a welcomed poster on this issue. She has more knowledge on estates and trusts than any of us!

However, moving forward, if you are finding the difficulties in your State, of the situation of Attorneys overstating property, do you not have an independent appraisal service/system that your clients might call. Such as in California, clients can call independently (not relying on an attorney or attorney service) a California Probate Appraiser. Usually they are less expensive than a regular property appaiser, and I would have to believe probably a little more reliable on their valuation. Costs vary but on the low end starting around $250=$300 and then escalating, depending on the valuation of the estate.

Based on your last post, I would think that if the estate distributes the property

The estate (the same one that I asked about a year ago) is in the process of distribution. I'm thinking the "operating" losses should be reported as ordinary (loss). The real estate will not be sold until after the estate is closed, so this grossly overvalued property would be transferred to the heirs at its overvalued basis. If and when the property sells, each beneficiary will have a capital loss to report on their 1040 approaching $50,000

The estate/trust take on the value as of the date of death based on appraisals from the estate attorney, appraiser, probate, etc or whoever the powers to be in charge of the property appraisal, and then that value passes onto the beneficiaries on distribution. if the property had not been disposed of during the estate/trust administration. So if the estate/trust does not sell the property during their administation, they distribute assest accordingly showing no gain/loss on the form 1041. When the beneficiary sells their share they use the allocated basis (estate step up value) and the resulting factor will be either a gain or a loss.

Snags, remember, even though you might think the property is overvalued, that is not your function. You are relying on other "parties" to provide you with that information, such as attorneys, appraisers, probate appraisers, etc. So if there is a loss, there is a loss. Same would happen with either a capital gain pass through or a NOL passed through or excess deductions (all of course depending on the character of the asset/gain/loss)

As I understand it, the beneficiaries gain/loss/or excess deduction is all predicated on the value of the estate at the time of death, even if there was not a 706 form filed, and if the gains/losses can not be handled through the form 1041 then they would be passed through to the beneficiaries.

I just closed one after 10 years, and had a relative large loss on a property that was valued on the books from the attorney , the independent appraiser and accepted by the probate court.. IRS had accepted the valuation on the 706 form (as there was an informal audit) so that is what we used for basis at the beneficiary level.


Sandy