Sale of inherited house


B

Bob K.

My sibling and I inherited a house in Sept 2004 and sold it
on Jan 2005. I signed the closing papers as personal
representative of my father's estate. The will was probated
and I distributed the proceeds from the sale to my sibling
and myself. Now as personal rep I need to file a 1041 for
the estate, if necessary. So my question is, should I file
or not?

This is the ONLY income from the estate in 2005 (other
assets held in noninterest bearing account or were otherwise
transferred to beneficiaries upon death). I have the 1099B
form from the settlement company, so the IRS will presumably
get this as well.

The basis of the house would be adjusted to account for
closing costs and real estate agent fees, so there will not
be any capital gain from the sale. (A loss is not helpful
either, because there is no other income to offset). So one
could argue that the estate does not reach the 600$ needed
to file a return. However, I would like to put this to
rest, and avoid queries from the IRS down the road. So
should I file a return (which would consist mainly of the
Schedule D and estate info)?

Thanks for any input,
Bob K.
 
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J

Jo Firey

Bob K. said:
My sibling and I inherited a house in Sept 2004 and sold it
on Jan 2005. I signed the closing papers as personal
representative of my father's estate. The will was probated
and I distributed the proceeds from the sale to my sibling
and myself. Now as personal rep I need to file a 1041 for
the estate, if necessary. So my question is, should I file
or not?

This is the ONLY income from the estate in 2005 (other
assets held in noninterest bearing account or were otherwise
transferred to beneficiaries upon death). I have the 1099B
form from the settlement company, so the IRS will presumably
get this as well.

The basis of the house would be adjusted to account for
closing costs and real estate agent fees, so there will not
be any capital gain from the sale. (A loss is not helpful
either, because there is no other income to offset). So one
could argue that the estate does not reach the 600$ needed
to file a return. However, I would like to put this to
rest, and avoid queries from the IRS down the road. So
should I file a return (which would consist mainly of the
Schedule D and estate info)?
The amount on the 1099B is the gross income the IRS is going
to be looking for on an estate income tax return. Losses in
the final year of an estate pass through to the
beneficiaries. They may be able to use them.

Jo
 
T

traalfaz2

So should I file a return (which would consist mainly of
the Schedule D and estate info)?
Yes, because the loss on the sale will pass thru to the
beneficiaries along with the excess expenses on termination.
The loss is reporatble on each beneficiaries' return as a
capital loss and the excess expenses can be taken as an
itemized deduction subject to the 2% AGI limit...

It would be easy enough for the beneficiaries to claim the
loss in the abscence of the filed 1041, but they'd lose out
on the execess on termination as it will not have been
established as fact w/o the 1041 and K-1's therefrom to back
up the deduction...

Dave
 
D

David Woods, EA, ChFC, CLU

Bob K. said:
My sibling and I inherited a house in Sept 2004 and sold it
on Jan 2005. I signed the closing papers as personal
representative of my father's estate. The will was probated
and I distributed the proceeds from the sale to my sibling
and myself. Now as personal rep I need to file a 1041 for
the estate, if necessary. So my question is, should I file
or not?

This is the ONLY income from the estate in 2005 (other
assets held in noninterest bearing account or were otherwise
transferred to beneficiaries upon death). I have the 1099B
form from the settlement company, so the IRS will presumably
get this as well.

The basis of the house would be adjusted to account for
closing costs and real estate agent fees, so there will not
be any capital gain from the sale. (A loss is not helpful
either, because there is no other income to offset). So one
could argue that the estate does not reach the 600$ needed
to file a return. However, I would like to put this to
rest, and avoid queries from the IRS down the road. So
should I file a return (which would consist mainly of the
Schedule D and estate info)?
One would question why you're already getting a 1099 for a
2005 transaction.
 
B

Bob K

One would question why you're already getting a 1099 for a
2005 transaction.
Thanks for the responses.

Sorry, I meant that this was the only income for the estate
in 2004, not 2005.

Also, regarding taking capital losses as Jo and Dave
suggested, I was not thinking of that for several reasons.
-First, I was not sure a capital loss could be distributed
to the estate beneficiaries, like income can. Can it?

-Second, I have to estimate the FMV of the house upon death
(Sept 2003), compared to the selling price at settlement
(Jan 04). The housing market in our area is genuinely
insane, so it is difficult to accurately estimate the FMV
for 4 months earlier (no appraisal was done then). So I
have to make a guess (price increase of >15%/yr, so maybe
increase of 5-6% by time of sale?). I still get some
capital loss, but not too much. Would I do not want to bet
my own 1040 on this type of loss.

-Third, I had read before that if an estate house was not
rented out or a source of income (it was not), then no
capital loss can be declared. If it were a for-profit item,
then it could be. Is this wrong?

Anyway, my question was really asking (assuming I don't want
to try for a capital loss), is it worth filing a 1041 to
show a small loss just to complete the estate and to avoid
the IRS and the state asking questions down the road (when
they see the 1099 but no return)?
 
A

Arthur L. Rubin

Bob said:
-Third, I had read before that if an estate house was not
rented out or a source of income (it was not), then no
capital loss can be declared. If it were a for-profit item,
then it could be. Is this wrong?
An estate cannot have "personal use property", as it isn't a
person. Hence the estate can at least claim a capital loss
on property NOT used by a beneficiary, if not on any real
property.
 
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D

D. Stussy

The amount on the 1099B is the gross income the IRS is going
to be looking for on an estate income tax return. Losses in
the final year of an estate pass through to the
beneficiaries. They may be able to use them.
The amount of the 1099-B is not gross income but GROSS
PROCEEDS. The IRS knows (or is supposed to know) that there
is a difference. Filing requirements are based on gross
income - which is often less.
 
B

Bob K

D. Stussy said:
Jo Firey wrote:
[original message snipped out]
The amount on the 1099B is the gross income the IRS is going
to be looking for on an estate income tax return. Losses in
the final year of an estate pass through to the
beneficiaries. They may be able to use them.
The amount of the 1099-B is not gross income but GROSS
PROCEEDS. The IRS knows (or is supposed to know) that there
is a difference. Filing requirements are based on gross
income - which is often less.
So, if due to selling expenses the sale of the house does
not produce a gain (or one less than the 600$ minimum filing
requirement), I would not be required to file a tax return
for the estate (as I noted, the house sale is the only
potential income). In your experience, would it be wise to
file the return anyway just to avoid a likely inquiry by the
IRS later. Or should I simply see it the IRS raises this,
and then respond (presumably with the estimates of FMV and
selling costs).

If I do file, I assume I should attach a short explanation
noting the FMV and selling costs to support my calculation
of the basis?
 
D

D. Stussy

Bob said:
D. Stussy said:
Jo Firey wrote:
[original message snipped out]
The amount on the 1099B is the gross income the IRS is going
to be looking for on an estate income tax return. Losses in
the final year of an estate pass through to the
beneficiaries. They may be able to use them.
The amount of the 1099-B is not gross income but GROSS
PROCEEDS. The IRS knows (or is supposed to know) that there
is a difference. Filing requirements are based on gross
income - which is often less.
So, if due to selling expenses the sale of the house does
not produce a gain (or one less than the 600$ minimum filing
requirement), I would not be required to file a tax return
for the estate (as I noted, the house sale is the only
potential income). In your experience, would it be wise to
file the return anyway just to avoid a likely inquiry by the
IRS later. Or should I simply see it the IRS raises this,
and then respond (presumably with the estimates of FMV and
selling costs).
Technically correct. However, I usually advise the filing
of non-required returns if for no other reason than to start
the period of limitations. Therefore, I would file it.
[There's also the passthrough issue here.]

Personally, I consider this an ABUSE of IRS authority -
because they're not following their own definitions. [The
IRS itself, not Congress, sets the "filing requirement"
standards.]

Last year, one of the returns I prepared was on behalf of a
friend's (he himself was not a client) deceased relative
where the IRS asked for a return on account of a stock sale.
Upon completion, there was insufficient gross income to
require filing. I attached a copy of the IRS's request to
the front (folded as a half-page), with a notation in red
ink, "Return NOT required but specifically requested," to
let them know of our displeasure of their interpretation.
If I do file, I assume I should attach a short explanation
noting the FMV and selling costs to support my calculation
of the basis?
NO. Do not provide such unless the return is examined.
 
B

Bob K

Thanks for the reply. I also thought filing made sense to
bring some closure to this. I think I will also not include
any supporting information, as you suggested.

Bob
 
B

Bob K

Arthur L. Rubin said:
Bob K wrote:
An estate cannot have "personal use property", as it isn't a
person. Hence the estate can at least claim a capital loss
on property NOT used by a beneficiary, if not on any real
property.
One final point on this issue of declaring a loss when
selling a house in the estate of a parent (if anyone is
still following this thread...). The IRS instructions for
2004 for 1041 (and various schedules, including D) says on
page 34 (3rd column, first full paragraph):

"If the losses from the sale or exchange
of capital assets are more than the gains,
all of the losses must be allocated to the
estate or trust and none are allocated to
the beneficiaries."

This seems to say that you cannot distribute a capital loss
to the beneficiaries.
 
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D

D. Stussy

One final point on this issue of declaring a loss when
selling a house in the estate of a parent (if anyone is
still following this thread...). The IRS instructions for
2004 for 1041 (and various schedules, including D) says on
page 34 (3rd column, first full paragraph):

"If the losses from the sale or exchange
of capital assets are more than the gains,
all of the losses must be allocated to the
estate or trust and none are allocated to
the beneficiaries."

This seems to say that you cannot distribute a capital loss
to the beneficiaries.
On an annual basis, no. However, see "excess deductions on termination." IRC
642(h)(1) specifically allows a capital loss carryover (carryforward) [and an
NOL] to flow through that ONE TIME.
 
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A

Arthur L. Rubin

Bob said:
One final point on this issue of declaring a loss when
selling a house in the estate of a parent (if anyone is
still following this thread...). The IRS instructions for
2004 for 1041 (and various schedules, including D) says on
page 34 (3rd column, first full paragraph):

"If the losses from the sale or exchange
of capital assets are more than the gains,
all of the losses must be allocated to the
estate or trust and none are allocated to
the beneficiaries."

This seems to say that you cannot distribute a capital loss
to the beneficiaries.
Without researching it, I seem to recall that capital losses
from a FINAL estate return can be distributed to the
beneficiaries. I quite agree that capital losses on
a non-final estate tax return are retained as a tax
attribute of the estate.
 

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