Sale of home in family trust with a reverse mortgage? How is this reported on the 1041?

[Tax Guy1968]

My parents have passed and I am the trustee for the estate. I don't know how to report the sale of the home with a reverse mortgage on the estate. The reality took from the sale proceeds to pay off the reverse mortgage. The trust received the remaining funds. How is this reported on the 1041/ 

[M-MTax]

https://www.nolo.com/legal-encyclopedia/tax-implications-reverse-mortgages.html BUT the payoff is the same as if you paid off a regular mortgage.

[ColeenD3]

Gain and loss are calculated by comparing the sales price with the adjusted basis of the property. Mortgages do not enter into that calculation in any way.

[ScruffyCurmudgeon]

The Sale of the house which was formerly the personal residence is for tax purposes considered the sale of investment property.  If the Estate sold the property, it is reported on the Form 1041.  An exception exists if the house first passed through inheritance to the beneficiary in which case the sale is reported on the beneficiary's Form 1040.

Please follow along in the attachment for entering, best in forms mode within the TurboTax Business program, how to report the sale of the house.  As was mentioned, the "reverse mortgage" is nothing more than an additional lien or loan on the house and the payoff amount is first deducted from the proceeds of the sale and as such should not be a component of the reported net proceeds of the sale.  NOTE: Sometimes a real estate agent erroneously calculates the amount that may be shown on a Form 1099-S so do verify that the Form 1099-S is correct.

ATTACHMENT:  See the  PDF Attachment "Sale of Decedent's House - simplified to follow along"
  NOTE: this attachment is an Adobe PDF that must be downloaded to view

Start on the Form 1041 screen at "Your Income" and within the "Investment Income" Select "Home Sales" in that section but before you do, you may wish to click the "Learn More" link for a thorough explanation of why this sale is a Long-Term Capital Sale and may in fact, unlike the sale of a personal residence owned by a living person, generate a Loss instead of a Gain, when the sale occurs at a price and proceeds less than the house was worth on the date of death (example, prices fall over a several month period) .

• Click the Homes Sales
• Note on Home Sale" that this case does NOT include where the house was rented out after the Estate received the house into Estate Assets.  If the house was rented out after the death of the owner, the process will require additional steps not shown in this answer.
• Answer Yes to Did you sell a home for this Trust?
• Note the information you will need before proceeding-  dates, selling price from the HUD Settlement statement and total cost including:
  • Gross proceeds, and net proceeds after HUD Settlement charges including real estate agency fee, other taxes or fees paid to settle, legal costs, BUT not pre-paid real estate taxes which are reported elsewhere as Taxes Paid.
  • Dates of acquisition by Estate (the screen is wrong as it is not the date "you bought")
  • Also include as costs any known improvements that were made before death or after Estate received - such as costs related to making ready to sell
• Enter the location - address of the house
• Enter date of sale closing, the financial data of selling price and all costs related to making the sale, note that this is where the mortgage payoff may be entered if the Gross Proceeds were reported because the payoff reduces the Net Proceeds.  Note the other typical costs of selling the house.
• This example does not include the case where you or the beneficiary occupied/used the house as a personal residence after the house passed to the Estate.  See Note.
  This example is based on answering No to "Was this home used for personal purposes?"
• Enter the "Basis" of Home - What was it worth on the date of death? - Note that the legal costs of filing a probate or land court filing relating to transferring the title from the Decedent to the Estate, if it was necessary, is an addition to the Basis, not a cost of selling the house.
• In this case, show, there is a small Gain on the sale.

For a more detailed example, not with the values shown in the first example, where this second example shows the gain being passed through to the beneficiary on the Schedule K-1. 
Decedent Home sole by Estate Form 1041

[JuliaAgnes]

Does anyone know how to report the proceeds on the sale of a reverse mortgage? The facts are my spouse has a reverse mortgage with his mother. When she sells/dies, would we file a Schedule D like a stock, that is the basis minus the proceeds = gain/loss? Or does it get applied interest, fees and then return of Principal? I cannot get the IRS to answer the phone. Thanks

[Anonymous_]

Accrued interest on the loan may be deductible when the loan is repaid.

The loan balance and any accrued interest have nothing to do with any gain on the sale of the home, however. To the extent ownership is vested in your mother-in-law (and is included in her estate), there will be a step up in basis to the fair market value (on the date of her death) of her ownership interest in the home.

[JuliaAgnes]

Apologies, I was not clear in my question. My husband is acting like the bank, loaning his mother money through a mortgage, which is recorded on the title to her home. My question is when the house is sold at her death/or she chooses to sell, how we will, on our 1040, record this activity. Let's say the loan was $10,000; accrued interest is $5000 but the house sells at $11,000. Someone suggested we first have to recognize the $5000 interest, and then we have $6000 of return of principal and a loss of $4000 which we take $3000 a year until exhausted. Does this sound correct or do we record it like a stock sale: cost - proceeds = g/l? 

[Anonymous_]

For your purposes, with respect to your individual income tax return (Form 1040), you have interest income and return of capital; the selling price of the house is largely irrelevant.

Your mother-in-law may have capital gain depending upon her adjusted basis and actual selling price less expenses.

If your mother-in-law passes away while still owning the home, the property should receive a stepped up basis to its fair market value on the date of her death.

[JuliaAgnes]

Thanks so much for your time.