Sale of inherited property

[peggysioux]

Parent of 8 adult children passed away in 2000 and piece of property was divided among the eight children with one child receiving a much bigger piece of the pie than the other seven children. Property is in New Mexico and several of the children live in CA. The eight children have been squabbling over the property for several years and several of the children paid an attorney to fight the will so that the one child would not receive the bigger piece of the property. I do tax returns for three of the children. The property was finally sold in 2007 and the three clients came to me to figure estimated tax payments due to the income they received from the sale. One of the clients wants to deduct the attorney fees from the income received, but the attorney fees were not due to the sale of the property, but to fight changing will. Is there any way these fees can be a deduction?? I don't think so, but thought I might be missing something. Also, I figured estimated tax payments for state of New Mexico because property was in New Mexico, even though clients live in CA, but one of the siblings that I do not do taxes for advised her siblings that her tax preparer did not figure New Mexico, but did figure CA estimated tax payments. Tax is due to the state where the income was derived - correct???

Thanks!

Peg

[BOB W]

2 Questions

2- The State where the property was located will require a tax return on the profit, Est should be filed.

1- I would say the attorney's fee were for the determination of future income, if it only had to do with the NM property. I would deduct them as part of the cost basis, if they were successful in getting a larger share of the property.

[peggysioux]

Bob,

The attorney of the siblings was unsuccessful in getting breakdown of split between all the children changed so that the one daughter would not get a much larger piece then the rest of the siblings. So, do I understand you correctly in that if the attorney was successful in getting will changed so that they received a larger portion, then it would be deductible, but if attorney is unsuccessful, then the attorney expense is non-deductible? Do I have it correct??

[BOB W]

Frivolous issue

I could not say for sure and I'm working off the top of my head (not much there) on this issue. But if they were successful, that would mean they had merit to their case. otherwise it was just a frivolas attempt having no basis.

But you should wait for others to chime in on this portion of your question>>> Needless to say, that is how I would handle this expense.

[jainen]

an investment expense

>>the attorney's fee were for the determination of future income<<

An inheritance is not taxable income, and legal fees in connection with such are not deductible.

The possibility or fact that inherited assets might later produce income is not relevant. Consider the case of a division of property in a divorce. A plan to sell the property does not convert the attorney's fee into an investment expense.

[erchess]

NO Estimated Tax Payment

is due when someone inherits something because inheritances are not taxable. However, an Estimated Tax Payment may very well be due when an inherited item is sold because income from sale of property is generally taxable.

So what I want to know is why the estate did not sell the property and pay the tax on the sale, then distribute tax free income to the heirs?

[WhiteOleander]

is due when someone inherits something because inheritances are not taxable. However, an Estimated Tax Payment may very well be due when an inherited item is sold because income from sale of property is generally taxable.

So what I want to know is why the estate did not sell the property and pay the tax on the sale, then distribute tax free income to the heirs?

If the estate pays the tax, the bene's still end up paying in the long run. They just inherit less when it is distributed. And, the tax rates for estate are usually higher than the individuals.