Inherited 2 installment sale contracts from a deceased relative in 2016. Do I need to claim the interest and principal paid?

[RichardK]

Generally, installment sales contracts are reported the same as they were reported by the decedent. The beneficiary reports the same gross profit percentage and interest income as the decedent would have reported.

When assets pass from a deceased to a beneficiary, some assets receive a step-up-in-basis and some asset do not receive the step-up-in-basis. For asset where the deceased deferred income for tax purposes, the beneficiary does not receive a step-up-in-basis, but rather is put in the same position as the decedent. This is referred to as Income in Respect of a Decedent, click here for IRS publication 559 (see page 9) Survivors, Executors, and Administrators.

[mhenry11]

I am hoping for a way around the rule. My mother inherited an installment sale contract from my father. He sold his farm land in 2007. My father passed away in 2018. For 2018, the installment sale was reported in the same way as previous years. However on my mother's 2019 return she is getting hit hard with the capital gains tax on this installment sale because her filing status is now single.  It is tough to see her income go down by 40% while her tax liability go up by 60%.  On her past joint returns with my father, the capital gains tax of 15% did not kick in.  Any advice?

[JamesG1]

Are you able to view the tax computation worksheet within the program?  Perhaps you could compare the 2018 MFJ tax computation worksheet with the 2019 Single tax computation worksheet and see if something jumps out.

I am viewing a Schedule D Tax Worksheet (which you may or may not have in your tax return) and see standard deduction amounts on line 15, line 19 and line 26.  There are large differences between MFJ and Single just on this tax computation worksheet.

It may be that the difference is simply the difference between MFJ and Single.

[mhenry11]

Yes, you are correct. When she filed jointly in the past with my father, the capital gains tax for the installment sale did not kick in. Now that she has to file single, the capital gains tax kicked in.  I know that when assets pass from a deceased to a beneficiary, some assets (including this farm land) receive a step-up-in-basis. However, with this installment sale it looks like that would not apply (IRS publication 559, page 9, Survivors, Executors, and Administrators.) Is there anything I am missing that would help reduce her tax liability?  Seems crazy that her taxable income went down 32% and her tax liability went up 60%.

[Anonymous]

there is another concept that applies to your situation. it's called income in respect of a decedent.   basically income the decedent was entitled to but didn't collect before death.     there is no date of death step-up for these items.  the recipient reports them as their income.        this would include installment sale income under IRC 691(a)(4)

IRC code section 691

(a)Inclusion in gross income
(1)General rule

The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of:
(A)the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent;
(B)the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or
(C)the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent’s estate of such right.

(4)Installment obligations acquired from decedent

In the case of an installment obligation reportable by the decedent on the installment method under section 453, if such obligation is acquired by the decedent’s estate from the decedent or by any person by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent—

(A)

an amount equal to the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent (determined under section 453B) shall, for the purpose of paragraph (1), be considered as an item of gross income in respect of the decedent; and

(B)

such obligation shall, for purposes of paragraphs (2) and (3), be considered a right to receive an item of gross income in respect of the decedent, but the amount includible in gross income under paragraph (2) shall be reduced by an amount equal to the basis of the obligation in the hands of the decedent (determined under section 453B).

(5)Other rules relating to installment obligations

(A)In generalIn the case of an installment obligation reportable by the decedent on the installment method under section 453, for purposes of paragraph (2)—

(i)

the second sentence of paragraph (2) shall be applied by inserting “(other than the obligor)” after “or a transfer to a person”,

(ii)

any cancellation of such an obligation shall be treated as a transfer, and

(iii)

any cancellation of such an obligation occurring at the death of the decedent shall be treated as a  transferby the estate of the decedent (or, if held by a person other than the decedent before the death of the decedent, by such person).

(B)Face amount treated as fair market value in certain cases

In any case to which the first sentence of paragraph (2) applies by reason of subparagraph (A), if the decedent and the obligor were related persons (within the meaning of section 453(f)(1)), the fair market value of the installment obligation shall be treated as not less than its face amount.

(C)Cancellation includes becoming unenforceable

For purposes of subparagraph (A), an installment obligation which becomes unenforceable shall be treated as if it were canceled.

[mhenry11]

I may be missing something but I don't see how IRC 691 (a)(4) helps in this case of an inherited installment sale income. Mother will have to pick up the income, report it as a capital gain (as was done on prior joint returns) and pay the 15% capital gain tax rate because her filing status changed to single.  And she will not have the choice of stepping up the basis of the farm because it was an installment sale per (IRS publication 559, page 9, Survivors, Executors, and Administrators.). I'm trying to find something that proves me wrong but I don't think this does.

[DRMsuncity]

Inherited promissory  note on installment sale of rental property from my deceased spouse.

Do I pay Federal tax on the inherited principle payments? Does the cost bases change to market value at time of death?

[Mike9241]

you have what is referred to as income in respect of a descendant which makes it taxable to the recipient.    the fact that the underlying property had a FMV is irrelevant.  the property was sold so it was no longer owned by the estate 

The beneficiary reports the same gross profit percentage and interest income as the decedent would have reported. For asset where the deceased deferred income for tax purposes, the beneficiary does not receive a step-up-in-basis, but rather is put in the same position as the decedent.