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Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

My 2 sisters and I inherited land from my mother who died in 2011. FMV in 2011 is TBD at this point. Property was sold in 2019 for $19K, minus brokers fees, etc. Net proceeds were NOT divided evenly. By agreement to cover past taxes paid, 3 siblings' shares were approx. $10K, $4K, and $2K. Are capital gains or losses on the sale still distributed evenly, or proportionately to how much each sibling received?

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13 Replies
Carl
Level 15

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

The estate will issue each beneficiary recipient a K-1. That K-1 will show the cost basis for each recipient, and the amount of the proceeds paid to each recipient. If there is a gain (where proceeds to a recipient exceeds that recipients share of the cost basis) then they will pay taxes *only* on the gain.
The estate administrator that completes the 1041 Trust/Estate return should know this already.
Carl
Level 15

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

One other thing I just caught:
"By agreement to cover past taxes paid,"
The estate administrator is required by law to distribute things in accordance with the will. If no will exists, then state law dictates how things are distributed. So if no will, state laws determine how things are distributed. If there is a will, then things must be distributed per the will. I've never seen a case where the will can be legally deviated from "by agreement" outside of the will. Not saying it isn't possible. I've just never seen it, or even heard of it.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

I realize it’s unusual but you’d need to know my crazy family to understand!

My parents bought the property in Florida around 1985 or so. Dad died in 1987. Mom became the owner, with my two sisters and I on the deed as successors upon her death. While I’ve seen the deed written that way, I have no knowledge about a will. Mom passed in 2011. My oldest sister became her executor and I was not told about the property until a few weeks ago, when she realized she couldn’t sell the property without me (she tried.)

After the proceeds were calculated after broker fees and closing costs, divided by three (some $5,500 each or thereabouts,) my executor sister’s husband announced that he’s been paying the property taxes for all these years and wanted restitution from my other sister and me. That would have been $2,800 out of each of our shares. He threatened to kill the deal and let the property go into foreclosure. Anyway, I negotiated that I would only sacrifice a portion of that and we agreed that, at closing (and as reflected on the closing paperwork,) I would get $4k, my other sister would only get $2.4k, and my executor sister and her husband would get the remaining $9.5k (these are all rounded numbers...) The 1099-s in the closing package (we would each get one,) shows the selling price as $19k.

Who is this “estate” that is supposed to sort out the Form 1041 and K-1 amounts? If it’s my sister, I doubt it will happen. If it’s some legal entity, then I guess I can trust it.  I just don’t want to wind up paying federal taxes based on either the full $19k or even for an assumed third of that, because I got much less than that. Thanks!
Carl
Level 15

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

I don't know what state your mom resided in, but for this specific property it could matter, because FL is not a community property state. The community property states are Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin. I am going to assume your mom did not live in any of those states when she passed. Now I'm going to use some arbitrary numbers here, because there's apparently something that everyone involved in this on your end, does not understand.
"Who is this “estate” that is supposed to sort out the Form 1041 and K-1 amounts?"
When a person dies and that person has assets (real estate *is* an asset) weather they have a will or not, all of the deceased person's asset have to go through a legal process called "probate". One key part of the probate process is the "legal" appointment and/or recognition of someone who is legally responsible for the assets of the deceased. That person is referred to as the administrator of the estate. No will is necessary for this process - but it does make it a lot easier, less costly and avoids any arguments or misunderstandings by the beneficiaries of the estate of the deceased.
The administrator is legally responsible for establishing an estate and obtaining an EIN (Employer Identification Number) from the IRS, for that estate. Then all of the assets of the deceased are transferred to the estate. With real estate, that means that real estate is deeded from the deceased, to the estate of the deceased. From there, all outstanding debts of the deceased are paid from the estate. Then any remaining assets/money left are distributed to the benificiaries as dictated by the will, or by state law if there is no will.
Your case while not that complicated, isn't exactly that simple either. So let me pick some arbitrary numbers to help you understand this.
- Mom and dad purchased FL property in 1985 (or thereabouts) for $50,000. Both of their names (and only their names) were on the deed as JTWROS (Joint Tenancy With Right Of Survivorship). Theefore each had 50% ownership with a value of $25,000 for each of them.
 - When dad passed in 1987 the FMV (Fair Market Value) of the propery on the date dad passed was $60,000. So dad left mom his 50%, and on the day of his passing, his 50% was worth $30K. So mom's new cost basis on the property was $55K. She got a "step up" in cost basis of the FMV of dad's 50% on the day dad passed away.
Now, before I can go any further, I need to know when you and your 2 sisters were added to the deed. Before dad passed? Or after? This matters, because it has a "huge" impact on the ownership percentage and cost basis for everyone.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

If you each owned 1/3, then you each pay taxes on 1/3 of the gain (the increase in value since 2011).

Your reduced amount you received is essentially repaying a loan to your brother-in-law for the taxes, which does not affect reporting this sale.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

Mom was a resident of NY and passed away there. My sisters and I were added to the deed in 2001.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

Was this a beneficiary deed as opposed to the more typical joint tenancy deed?  If so the date of inheritance would be Mom's DoD with the resulting step up of basis and title should pass without having to go through probate.

With nothing more to go on than what you've posted I'd say TaxGuyBill's response makes a lot of sense.  Everybody shares equally in the gain and there's an agreed repayment of the carrying costs by the brother-in-law.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

I think you need an estate attorney or a tax attorney with estate experience.  An Elder Law firm might have both.  If the Will (or the state intestacy laws) say that (for example) the estate must be divided equally, then that is how it was divided.  If the proceeds were divided unequally, that might be viewed as gifts between the heirs AFTER the distribution of equal shares.  Since the shares might be taxable but gifts are not (and gifts are not deductible) this could really impact the tax situation of some of the heirs.  You need to be paying someone for expert advice, it might not be that much if you split the cost.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

All of this has helped and I thank you.

All that remains is how to enter this into TurboTax next year. I found out where it goes but there is no way to indicate that proceeds were shared three ways.

Would I just enter 1/3 of the step up value in 2011, 1/3 of the net proceeds to calculate what MY capital gain was?

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

It's still not clear you understand what happened or what is supposed to happen.

Here are two ways to handle when you inherit part of a house from a parent.

Method 1.  The estate of the deceased parent sells the house.  (An "estate" is a legal entity that carries on the business dealings of a person after they have died.  Your parent's estate may have only existed for a few months to close out their business.  The estate of someone famous like Michael Jackson can continue for years or decades to manage the income from their copyrights and other property.)

If the estate sells the house, the estate must pay any taxes.  The estate must pay all of the other lawful debts of the deceased (credit cards, last utility bills on the house, phone and cable bill, past-due property taxes, and so on.)  If there is any money left over, it is distributed to the heirs.  In this case, the heirs receive money, and pay no tax on that money (*there are rare exceptions to this.)

Method 2.  The house is sold by the heirs, not the estate.  The heirs report the sale of the asset and pay tax on any capital gains.  If you inherited 1/3 of the house under state law or the operation of a Will, you pay tax on 1/3 the gain, even if you did not receive 1/3 the proceeds.

Not it is not clear to me, how you the heirs, could legally sell the property without an estate, and be paying off taxes.  (By taxes owed, I think you probably mean property taxes on the house.)  It could very well be that you owe more than your proceeds, if the transaction was done incorrectly.  (For example, if the FMV of the house was $100,000 when your parent died, and it was sold for $160,000, then each of three siblings has a $20,000 gain.  But if, because of outstanding mortgage, interest and property taxes, you only received $4,000, then your tax on $20,000 gain could be $3000, leaving you with almost nothing.

The taxes should have been paid from the estate, and if the only asset was the house, it should have been sold way earlier so as to preserve any value it might have had.

If the house was sold by method 1, you don't owe any tax, unless some part of the estate payout to you is taxable for an unusual reason.  

If the house was sold by method 2, you would report 1/3 the cost basis, and 1/3 the selling price, and pay tax on 1/3 the gain, assuming you are a 1/3 beneficiary.

I still think you need to see a tax attorney to make sure everything was done correctly and that you understand how everything was done.
Carl
Level 15

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

Overall, I get the impression things have been done without probate. I know in FL if I tried to sell a house where one of the owners was deceased, there's no way that transaction would be completed without the signature of the deceased party. If I have 50% ownership in my mom's house and I attempt to sell it after her passing without having run things through probate, then the deed transfer will not occur.

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

Also under method 1, possibly the estate issues you a K-1 statement that reports your share of the sale and your share of the tax owed by the estate.  In that case, you report the K-1 on your tax return exactly as you receive it.  You pay the tax on your share instead of the estate paying it for you.  

Are proceeds from sale of inherited property taxed evenly or based on what amounts were distributed to each?

It sounds like maybe the will was probated in 2011, and the deed was modified to the 3 siblings, and the estate was closed.  So the three siblings sold the property in 2019.

Since the total is less than $19K, it may not be worth hiring an expert to untangle it.

Even assuming the property appreciated 40% in 8 years (5% per year, which is probably unrealistic for unimproved land) your basis would be $13,000, and the gains $2,000 each (minus expenses).  With a higher basis, your gain would be even less.  

If this is the case, then the three siblings owned equal shares and each received 1/3 the proceeds and owes tax on 1/3 the gain.  Then after the sale, you reimbursed one of your siblings for the property taxes (because if this was done right, each sibling would have been billed for 1/3 of the taxes every year since 2011 by your brother-in-law).  The fact that you reimbursed him for the tax doesn't change the fact that you received 1/3 the property.

So in Turbotax, report 1/3 the cost basis and 1/3 selling price.
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