Estate tax confusion

[jjh2006]

Hi all,

My wife's mother passed away in February, home was sold in April for $254k, and all proceeds went into the Estate to move through probate, etc here in Maryland. 

Will the distribution from the home sale cash to the four children be considered taxable income, or will we be fine with the full disbursement?

Thanks

[Anonymous_]

Absent unusual circumstances, the basis for the house will be its fair market value on the date of death of your wife's mother.

As a result, there should be little, if any, gain after selling expenses. If the estate is the seller of the house, the transaction will be reported on Form 1041 and, if necessary, the beneficiaries will receive K-1s for their share of any income and/or gain.

[jjh2006]

That's what I was hoping to hear! One of the (more difficult) siblings is insisting that we will pay income tax on this, but I cannot find anything that agrees with her on that.

So it sounds like 100% this is not considered income and will not need to be reported on our taxes for 2022 (except for the FMV part which should be little to no taxes)!

Thank you

[Anonymous_]

Any tax liability on the sale of the house would be a result of post mortem net gain on the sale (i.e., the extent to which the sales price (less selling expenses) exceeds the basis).

For the sibling that takes exception to the foregoing, you can cite Section 1014 of the Code.

https://www.law.cornell.edu/uscode/text/26/1014

[ScruffyCurmudgeon]

@jjh2006 
Just so as to understand your original and subsequent postings:

• All transaction dates (date of death, date of sale) are current year, Tax Year 2022?
  I note your wording: "Will the distribution from the home sale cash to the four children"  would indicate that the Estate sold the house.
• The house, previously the personal residence of the decedent ( your mother-ion-law), was sold by the Estate's Personal Representative (executor) and the sale was registered in the name of the Estate (or possibly your late mother-in-law's name) and proceeds were received by the Estate?
• If all points are correct, then any gain (or loss) would be reported by the Estate, not the beneficiaries:
• on Form 1041 - not on personal Forms 1040
• The sale would not be considered the sale of a personal residence but instead as an "investment asset" 
• gain or loss would be based on the net proceeds, and on a cost basis including all previous upgrade costs or costs associated directly with the sale
• No exclusion of gain to the Estate would be allowable. 
• Net proceeds distributed would be incorporated into an beneficiary distribution and would be reported on the Form 706 Estate Filing (if necessary, unlikely given amounts) and on Form 1041.
  The gain would be taxed at the Estate level not the individual level. 
• Considerable change to this response would be needed if the beneficiaries each receive a share of ownership of the house itself because the house is not sold by the Estate but instead passes through probate as shares of ownership with the sale to be undertaken by the beneficiaries.

@Anonymous_ 

[Anonymous_]

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@ScruffyCurmudgeon wrote:

• The sale would not be considered the sale of a personal residence but instead as an "investment asset" 

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Whether the sale is that of personal use property (i.e., a personal residence) or investment property would be dependent upon how the property was being used. 

If a beneficiary occupied the property, for example, then the house would be considered to be held for personal use. On the other hand, it the estate held the property for appreciation (or a similar purpose, including if the house was vacant), then the house would be considered to be held for investment.

The foregoing determination is really only critical if there is a loss on the sale. If there is a gain, it is taxable regardless while a loss can only be recognized if the house were held as an investment.

[Anonymous_]

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@ScruffyCurmudgeon wrote:

The gain would be taxed at the Estate level not the individual level. 

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If there is a gain (unlikely probably), it would be taxed at the estate level or, possibly, passed through to the beneficiaries on their K-1s.

[ScruffyCurmudgeon]

True, that the Final Schedule K-1 of the Estate's Form 1041 could, at the option of the Personal Representative, pass the gain onto the K-1 and the beneficiaries.  However, considering the low sale price and therefore a strong supposition that the Estate's Form 1041 Income is likely to be minimal, and considering the different interests of the beneficiaries (and particularly the individuals' differing sensitivity to tax liability) it is common that the tax liabilities are handled, and for simplicity, at the Estate level.

[ScruffyCurmudgeon]

Yes, as to personal residence in the general case, but that was not part of this poster's inquiry and instead it was reasonably clear that the Estate sold the house and distributed the proceeds. No mention is mage of a beneficiary taking up residence as either ownership or as renter, and in the latter case, there would have been mention of the rental income to be recognized as income, and of the schedule of listed property that would be necessary.

[Anonymous_]

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@ScruffyCurmudgeon wrote:

........it was reasonably clear that the Estate sold the house and distributed the proceeds. 

---

That is true and given the short period of time (less than two months) between the death of the owner and the sale, there could very well have been a loss after selling (and other) expenses which could be passed through to the beneficiaries on their K-1s.

[ScruffyCurmudgeon]

Again, all of the question of what happened to the proceeds of the sale of the house is dependent on the action of the Personal Representative.  Creation of a Schedule K-1 per beneficiary and its contents are dependent on that individual's actions and not the actions of the beneficiaries.  Pretty much the last several posts are outside the context of the simple question originally asked.  
The original poster, jjh2006, would have to expand the question with any information on whether or not the Estate recognized a gain or loss, and whether the Estate's Personal Representative made decision, based on the Estate's taxation situation, of whether any gain, if existed, or any loss, if existed, would be assumed by the Estate or passed through.
Trying to create an answer that fits all possible posters' question, without the specifics of the situation, can add complexity beyond OP's (jjh2006,) intents.

[Anonymous_]

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@ScruffyCurmudgeon wrote:

Again, all of the question of what happened to the proceeds of the sale of the house is dependent on the action of the Personal Representative. 

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Yes.

Actually, I believe all of this banter to be moot at this point since the proceeds have apparently already been distributed.

[ScruffyCurmudgeon]

@jjh2006 

This information was just made available to us:

 ErickaY

Moderator

‎10-18-2022 5:28 PM

 

Most of you are right. In the past we have "closed" to start prepping for the new tax year. However, this year we'll "stay open" a bit longer. Customers will be able to file until Nov. 30th (with exceptions, please see below). 

Here are some dates to keep in mind: 

Oct 17th - Last day to “timely file” an initial return for which an Extension has been previously requested

Oct 18th - TTOnline will be turning away new or not started customers

Oct 22nd - Last day to “timely file” a perfected/amended (previously rejected) return for which an Extension has been previously requested.

Oct 31st - TTOnline will start turning away all TY21 filings, 

• TY20, TY21 Amend will still be open for entitled users.
• TY19 Amend will shutdown
• EF Rejected users can still fix and resubmit

Nov 15th - All customers will be turned away for TY21

Nov 30th - TTLive Full Service Amended returns end 

@ErickaW 

[ScruffyCurmudgeon]

Most of you are right. In the past we have "closed" to start prepping for the new tax year. However, this year we'll "stay open" a bit longer. Customers will be able to file until Nov. 30th (with exceptions, please see below). 

Here are some dates to keep in mind: 

Oct 17th - Last day to “timely file” an initial return for which an Extension has been previously requested

Oct 18th - TTOnline will be turning away new or not started customers

Oct 22nd - Last day to “timely file” a perfected/amended (previously rejected) return for which an Extension has been previously requested.

Oct 31st - TTOnline will start turning away all TY21 filings, 

• TY20, TY21 Amend will still be open for entitled users.
• TY19 Amend will shutdown
• EF Rejected users can still fix and resubmit

Nov 15th - All customers will be turned away for TY21

Nov 30th - TTLive Full Service Amended returns end 

@ErickaW