Installment sale by deceased taxpayer

[Joe Btfsplk]

If someone sells real estate on an installment sale and reports the appropriate percentage of the principal each year as a capital gain--what happens when they die.

Would the heir continue reporting capital gains? Or would the heir only report the interest as income? Or would there be an ongoing income by the estate of the deceased?

It would seem that the heir would inherit a Note Receivable and would obviously owe tax on the interest income. It also seems unlikely that the tax on the balance of the untaxed capital gains would just vanish.

Does anyone know how the capital gains would be handled after the death of the original seller of the property?

[DTS]

Joe

Take a look at pg. 11, third column on this link. If I'm reading this right, it looks like nothing changes.

http://www.irs.gov/pub/irs-pdf/p537.pdf

Dennis

[solomon]

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=e6d78679075f361faebae862240830ec&rgn=div8&view=text&node=26:8.0.1.1.1.0.12.219&idno=26

[Joe Btfsplk]

Heir would apparently report capital gains

Thanks for the responses. It looks like the heir would report the capital gains the same as the decedent would have if he had lived. The capital gains tax rate would apply also.

I don't supposed the rules for stepped-up basis would apply if the widow inherited it since basis would have been applicable only at the time of the sale and could not be changed in the same manner as if he still owned the property rather than owning the mortgage note receivable when he died.

[Kram BergGold]

Installment Sale

My understanding is that there is no basis adjustmetn when someone inherits an installment sale. It is a situation where one just steps in the shoes. This si true to a spouse as well as any other beni.

[New York Enrolled Agent]

Installment sales acquired from a decedent are considered IRD. §1014(c) specifically denies the step up in basis to IRD.