Estate Tax Questions

[JeffS]

Hello all,

I recently sold my home my grandmother left to me. It was the only thing in the estate. I have an EIN and have recently opened an account for the Estate. After the remaining mortgage was paid, the estate was left with just under $89,000, which will be split between myself and my brother after a few people are paid for services rendered prior to selling the house. I am not sure how much more info I need to provide, but will be happy to. I suppose the gist of this is, what other forms do I need to fill out for the IRS and will I have to pay capital gains on the house? I have an appointment with H and R Block on Thursday, but if this can be solved without them, I would greatly appreciate it!

Jeff

[seattlecyclone]

The first ~$5 million of value on an estate is exempt from federal estate tax. I'm not sure which forms, if any, you're required to file if the estate was worth less than that.

Assets you inherited have their cost basis "stepped up" to their fair market value on the date of your grandmother's death. You'll only need to pay capital gains tax on any amount that it increased in value between that date and the date of sale.

[JeffS]

Since the value of the home increased in the two years since her death, I would need to pay gains?

[seattlecyclone]

Since the value of the home increased in the two years since her death, I would need to pay gains?

Did you live in the home for two full years since she died? The first $250k of gains is exempt from tax if so. If not, you'll owe capital gains tax on the increase in value since she died.

[JeffS]

My brother did, but we paid $135,000 when we bought it and sold it for $150,000 so it should be good, no?

[seattlecyclone]

My brother did, but we paid $135,000 when we bought it and sold it for $150,000 so it should be good, no?

Wait, did you buy the house or did you inherit it? I'm confused.

[jwright]

The $5M limitation applies to an inheritance tax (Form 706).  That allows for the assets to be transfered to beneficiaries.

This situation sounds like the estate is operating and earning revenue in the name and ID number of the estate itself.

The Form 1041 is the tax return that estate's must file.  There is a filing requirement if the estate earns more than $600 and the executor is responsible for making sure the return is filed.   If there is any tax due, the estate itself is responsible for paying.   But, if the income is distributed to the beneficiary then it will flow through to the beneficiary's individual return. 

The Section 121 gain exclusion for personal residence can carryover to the estate.   IRS Publication 559: Survivors, Executors and Administrators, page 16
Sale of decedent’s residence. If the estate is the legal owner of a decedent’s residence and the personal representative sells it in the course of administration, the tax treatment of gain, or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). This is the case even though it was the decedent’s personal residence and even if you did not rent it out.

I would need to do more research to see how the beneficiary living in the house effects these instructions.

[JeffS]

My brother did, but we paid $135,000 when we bought it and sold it for $150,000 so it should be good, no?

Wait, did you buy the house or did you inherit it? I'm confused.

Sorry, I say we but I meant we as a family. It was my grandmothers house left to my brother and I.

[seattlecyclone]

So your grandmother paid $135k for the house, then she died and left the house equally to you and your brother? Then your brother lived in it for at least two years after your grandmother died, at which point you sold it for $150k? Is that right?

[JeffS]

That is correct

[seattlecyclone]

Based on my reading of Publication 523, I don't see anything that says you can exclude gains for a residence based on your brother's time in there. He probably would not owe capital gains taxes on his half of the house, but I think you would.

Keep in mind that your cost basis is not the $135k your grandmother paid, but it's actually the fair market value of the home as of the date of her death. So you'll probably owe a bit of tax, but likely not more than a couple thousand dollars.

[JeffS]

Thank you! I appreciate it. We were already hit with some back taxes because the exemptions weren't taken off the house when she died. Just a little over $4,000 in property taxes at closing

[Frugalman19]

I'm a tax preparer, don't go to h&r go to a CPA or an EA and have them file the 1041. You don't want to hose this up. H&R can be really expensive and you might just get someone who has taken a 6 week course in tax. Often we get past returns from clients who went to H&R and the invoice is much higher than we would have charged.

Long story short your effective "purchase price" of the house is the value it was at your grandmothers date of death. Any increase in value will be capital gains, minus any expenses you had in selling the house (commissions to agents etc...)or any improvements you made after your greandmothers passing. Most of the time you will be able to take a loss on the sale and pay zero taxes. If you haven't you will have to get an appraisal of the house that is backdated to the date of death, which is pretty easy to get. Hope this helps, but don't do this on your own, go get some professional help it might save you a ton of money.

[JeffS]

I'm a tax preparer, don't go to h&r go to a CPA or an EA and have them file the 1041. You don't want to hose this up. H&R can be really expensive and you might just get someone who has taken a 6 week course in tax. Often we get past returns from clients who went to H&R and the invoice is much higher than we would have charged.

Long story short your effective "purchase price" of the house is the value it was at your grandmothers date of death. Any increase in value will be capital gains, minus any expenses you had in selling the house (commissions to agents etc...)or any improvements you made after your greandmothers passing. Most of the time you will be able to take a loss on the sale and pay zero taxes. If you haven't you will have to get an appraisal of the house that is backdated to the date of death, which is pretty easy to get. Hope this helps, but don't do this on your own, go get some professional help it might save you a ton of money.

Thank you! I will look for a CPA tonight

[Spork]

Based on my reading of Publication 523, I don't see anything that says you can exclude gains for a residence based on your brother's time in there. He probably would not owe capital gains taxes on his half of the house, but I think you would.

Keep in mind that your cost basis is not the $135k your grandmother paid, but it's actually the fair market value of the home as of the date of her death. So you'll probably owe a bit of tax, but likely not more than a couple thousand dollars.

Okay... I actually thought I understood how this worked just from observing my Dad's estate getting processed.  This makes me think I don't get it fully.

I thought the estate actually sold it... and the taxes would be paid by the estate.  The quote above makes me think the tax is owed by the beneficiaries.  Is this because it has been 2 years since grandmother's death?  In other words, had it been sold the year of her death and included in her last income tax filing, would it have been handled by grandmother's estate?

[Frankies Girl]

I'd say that if the property was still in the estate's name when sold, then yes. But I am not a professional by any stretch of the imagination.



When we sold my dad's house, it had been transferred to my sister and me, and we held it longer than a year (tons of cleanup & renovations).

We declared the value of the property according to the tax records from the county tax office at the time of probate. Our lawyer said we could just take it from that, or pay to have an actual assessment (which we didn't want, as the house was in a poor state of repair, and would have been assessed for a much lower value, which would suck when we went to sell for a more reasonable value).

So after probating the property, the title was transferred to us as 50/50 owners. We got to work on it, and after about a year and a half it was listed and sold within a few months. The assessed value at the time of probate was ~77K, we sold for ~$93K so the long term cap gains were reported ($22K divided by 2 = $11K in LTCG) on my taxes for that calendar year the house sold. Since it was a smaller amount, it fortunately didn't push me into having to pay any taxes.

I did my own taxes with the help of TurboTax, and it did stymie me for a while figuring out how to report the sale of an inherited property that I never lived in (they do NOT make it easy), but I think I did it correctly. If not, I've got all the paperwork and I'm sure they'll be able to see I tried anyway. ;)

[Spork]

I'd say that if the property was still in the estate's name when sold, then yes. But I am not a professional by any stretch of the imagination.

Okay... This is the case.  We have a contract on the house and it will be sold in the same year as my dad's death (assuming everything goes as planned).  The house is still in his name and proceeds will go to the estate and be distributed from there.

It's weird trying to do tax planning with emotions still a little raw.  But I am an obsessive when it comes to things like this.  I don't like surprises.

[Frankies Girl]

I'd say that if the property was still in the estate's name when sold, then yes. But I am not a professional by any stretch of the imagination.

Okay... This is the case.  We have a contract on the house and it will be sold in the same year as my dad's death (assuming everything goes as planned).  The house is still in his name and proceeds will go to the estate and be distributed from there.

It's weird trying to do tax planning with emotions still a little raw.  But I am an obsessive when it comes to things like this.  I don't like surprises.

Yeah, it really sucks trying to deal with all of that and mourning too.

I know it probably goes without saying, but do confirm that the house sold while still in the estate's possession will be a part of the estate like we think with an actual probate lawyer or accountant. I know it seems logical, but tax stuff can get weird.

[Spork]

I'd say that if the property was still in the estate's name when sold, then yes. But I am not a professional by any stretch of the imagination.

Okay... This is the case.  We have a contract on the house and it will be sold in the same year as my dad's death (assuming everything goes as planned).  The house is still in his name and proceeds will go to the estate and be distributed from there.

It's weird trying to do tax planning with emotions still a little raw.  But I am an obsessive when it comes to things like this.  I don't like surprises.

Yeah, it really sucks trying to deal with all of that and mourning too.

I know it probably goes without saying, but do confirm that the house sold while still in the estate's possession will be a part of the estate like we think with an actual probate lawyer or accountant. I know it seems logical, but tax stuff can get weird.

I will.  There is a trusted family friend that was Dad's tax accountant for business/personal stuff.  My sister is executor, but there have been a couple of meetings with him and will be more before 2016 taxes are filed.

[JeffS]

In my case, the house was sold in the name of the estate, I signed as Executor of the estate. All of the paperwork was signed, Estate of Grandmother's first name last name, My name as executor. Kind of a pain, but since the house was never put into my name, not sure how else to do it.