Deceased fathers property

[Disasterpiece77]

My father passed away in March of this year. No will. No spouse. No other assets other than his home, property and shop on the property. He was a Minnesota resident, as are my 2 sisters. I am a Wisconsin resident. My youngest sister and I waived our right to be personal representatives, allowing our other sister to take over. Probate was done in August. We are closing on the property sale end of October. Once all debts are paid through the estate, the money will be divided amongst us 3 girls. Do we all need to claim it on our taxes? Or is it just the personal representative that needs to file the estate taxes/capital gains/losses? Do my youngest sister and I need to claim anything on the roughly 70k we will each be receiving? We just want to make sure that we set aside enough to pay our portion come tax time.

[Opus 17]

That depends, in part, on how the estate is handled.  

Let's start with the basics that you only pay tax on any capital gains between the selling price and your cost basis.  If there was nothing going on like a trust or a gift deed, and the house was owned by your father in fee simple and was inherited the same way, then your cost basis is the fair market value on the date he died.  That means the only taxable part of the gain would be any increase in value between March and October.  You may need a real estate agent or property appraiser to give you a retroactive appraisal.  If the property is the same value, you have no taxable gain and might even have a deductible loss once your selling expenses are subtracted.   (You can't deduct a loss on personal property but you can on investment property.  Generally this means that if a sibling lived in the house with the father, that is their personal home and that sibling can't deduct a loss if there is one, but the other siblings could, as long as the property was used personally after they inherited it.)

(Because people sometimes do funny things with their property to "avoid probate", you might want to have the deed and transaction reviewed by an attorney to make sure you did gain the stepped up cost basis.)

Basically, each heir will report 1/3 the cost basis, 1/3 the selling price, 1/3 the selling expenses, and so pay tax on 1/3 the gain (if there is any gain); or deduct 1/3 the loss (if there is a loss).

Exactly how this happens depends on a few things.  The sale could be reported by the estate on a form 1041 estate tax return.  The estate tax return will issue a K-1 statement to each heir and you report the K-1 on your personal return.

Or, if the property is now owned jointly by the 3 siblings, then each sibling will report the sale of property in their tax return, using 1/3 the basis. 1/3 the sales price, and so on.  In Turbotax you would use the section for "Sales of property and other assets" and not the section for "Sale of your home" unless it was your personal home.

The least good thing is for the estate to actually report the sale and pay the taxes itself, because estate tax rates are higher than personal tax rates.

But you may want to have this all reviewed by a local tax pro to be sure. 

[M-MTax]

If the estate has an EIN and sold the property, then you will have to file a 1041 for the estate and will likely need the services of a tax pro (the estate also might be required to file a return for the State of Minnesota).

The estate can deduct all of the probate expenses, legal and accounting fees on its federal income tax return.

Sorry for your loss.