Determining Step-Up Basis for Rental Home that has sold

[randy5419]

My mother who died in June 2023 owned a rental home that recently sold.    It seems natural to compute the step-up basis value (i.e., the value of the home at the time of my mom’s death) as the gross sale price less the cost of improvements that the estate incurred prior to the sale (and of course after my Mom’s death). 

Is this right?   I ask because computing the home basis in this way will result in a capital loss on the home sale equal to the closing costs that the estate paid when the home sold.   That seems too good to be true. 

Thanks in advance for your help.

[Mike9241 · Accepted solution]

 Sorry for your loss. "It seems natural to compute the step-up basis value (i.e., the value of the home at the time of my mom’s death) as the gross sale price less the cost of improvements that the estate incurred prior to the sale (and of course after my Mom’s death)."  YES that's what is done. Yes there's usually a capital loss if sold shortly afterward due to closing costs involved. 

[randy5419]

I have a follow-up question.   It was agreed that an Estate selling a home will have a capital loss on the sale equal to the selling costs, which include commission paid to the selling and buying agents and tend to be large.  In my case, the selling costs were $78,000.

My question now is:  Can the Estate’s capital losses be passed through to beneficiaries of the Estate, so that the beneficiaries can carry the losses forward indefinitely and use them to offset gains?

[PatriciaV · Accepted solution]

Yes, when the estate files a final tax return, there are no carryover capital losses at the estate level. Instead, the entire capital loss carryover is allocated to the beneficiaries on Schedule K-1 Line 11 Code D (Final year deductions). This code denotes a long-term capital loss carryover.

See this discussion for more information: Solved: Reporting and Passing Capital Loss to Beneficiaries of Estate.

[randy5419]

Thanks PatriciaV.   I have another follow-up question.  I just learned that Washington State won’t review the Estate’s tax return for up to 12 months, which means I will be filing two more Estate Federal tax returns, for 2024 and for 2025.   (WA state may pay the Estate interest on overpaid tax in 2025.)  Can the Estate distribute capital gains to beneficiaries in 2024 even though the 2024 return it is not the final return?

[randy5419]

Correction to my question:  Can the Estate distribute capital losses to beneficiaries in 2024 even though the 2024 return it is not the final return?