For an estate selling the decedent's home, why is the selling price put in income?

[JulieH1 · Accepted solution]

The selling price is asked to see if there is any tax due via capital gains.

When a decedent dies and leaves the property (outside trust) to a beneficiary, the value of the home receives a "step up" in basis to the FMV on the date of death.  That is the estate's basis.  If the estate holds on to the property and it goes up in value, then the estate pays capital gains taxes on the amount the home went up.

For example,  Mom bought a home for $100,000 and lived there until her death.  The estate gets the home at its FMV on the date of death of $200,000.  Then the estate sells the home for $205,000 a few months later, the estate owes capital gains on the $5,000 but not on the difference of what Mom paid and the sales price.

[susanstrausser21]

Thanks TurboTaxJulieH1, maybe I'm confused as to where the home sale should be.  Should I only put what the capital gain is on the home sale or the total selling price?  where does one put the FMV to determine the capital gain?

[JulieH1]

Are you filing a final return or an estate return?  I see TurboTax Business listed as your software.  Is that what you are using?  Did the estate sell the house to then divide by beneficiaries or did the estate keep the money for something else?  How long has the estate been open?

[susanstrausser21]

Thanks for the reply.  I am using TT Business. This is an estate return (not final, though after tax returns are complete, I will distribute the estate monies). The estate sold the home and the proceeds are in the bank and will be distributed to the beneficiaries.  The estate was opened 1/5/17 (date of EIN), the death was 12/23/16.

[JulieH1]

Hi.  Sorry, I was answering another question.  So, you need to look at Schedule D.   That is the capital loss/gain schedule.  You will enter the property as "inherited" and the selling price.  Then under cost or basis, you will enter the FMV on the date of death.  The difference between the two is the gain or loss.  Make sure you enter the number of costs associated with the sale to lower the gain.  I will give you a link to those allowable costs.  The first link has screenshots to show you a sample 1041.  I cannot add in the comment section.
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/replies/3648116">https://ttlc.intuit.com/replies/3648116</a>
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p559">https://www.irs.gov/publications/p559</a>

[JulieH1]

An estate or trust can generate income that must be reported on Form 1041, United States Income Tax Return for Estates and Trusts. However, if trust and estate beneficiaries are entitled to receive the income, the beneficiaries must pay the income tax rather than the trust or estate. At the end of the year, all income distributions made to beneficiaries must be reported on a Schedule K-1.
This link is also very helpful:
<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/tax-tips/estates/what-is-a-schedule-k-1-form-1041-estates-and-trusts/L6X...>

[susanstrausser21]

Thanks so much.  I went to Schedule D and filled in the numbers.  Will see where the rest of the software takes me.  Thanks again!

[susanstrausser21]

Another question, where should I put the mortgage interest paid for this home for 2017 up to the sale?

[JulieH1]

Schedule A

[NightTreader]

Hi @JulieH1 

Your answer is very helpful. I am in a similar situation, but the home is the only asset  that was put into the trust. I noticed your answer said, "...(outside trust)". Our mother passed away in January of 2020 and we sold the property late October. 

I presume the capital gains will be minimal based on the FMV between January and November.

1. Is there a difference for a property that was put IN a revocable living trust that becomes irrevocable once the grantor dies?
2. Do I still file a 1041 or another form?

Thank you for your time!

[gloriah5200]

@NightTreader

@susanstrausser21

I am sorry for your loss.

You would still file a 1041 for the revocable living trust or an irrevocable trust. You would mark the type of entity at the top of the 1041 return.

Generally, while the taxpayer is alive, the trust is revocable and everything still falls under their control.  

You are correct, once the grantor of the revocable living trust passes away, then the trust automatically turns into an irrevocable trust and must get its own ein and file its own return.

If the house was the principal residence of the decedent prior to death, then it is considered a personal asset and if sold at a loss, the personal loss is not deductible.  A gain on the sale is taxable.

If mortgage interest is paid after the death of the decedent by the trust, then the trust would deduct that mortgage interest paid on line 10 of the 1041:

Per instructions for Form 1041:

Types of interest to include on line 10 are:

1. Any investment interest (subject to limitations—see below);
2. Any qualified residence interest (see later);etc.

For additional information, refer to the following link:

Qualified Principal Residence Interest Expense line 10 form 1041

[NightTreader]

Thank you so much @gloriah5200 

There was no mortgage since my dad built the house on his own without a loan. When my mother died, it was her primary residence, which was named in the trust. We sold the house 9 months after she passed away and put the funds into the trust account.

There was not a loss. Though there may have been a small gain. I presume, based on my research, that we  have to pay tax on the difference. Although I have read about a "step up in basis", which means the beneficiaries get a free pass on any capital gains on the increased value of the property. Do you know about this and can you explain?

Thanks again!

[gloriah5200]

Yes, you generally need to find out the value of the property on the date of your mother's death.  You have to be careful because not all methods are acceptable.  One generally accepted method is that if the property is sold within a short period of time as the date of death, then the selling price can be used as the fmv on the date of death.

One thing you must watch out for is that the type of use of the property before the decedent's death is generally the same as the type of use of when it is received into the trust due to death. 

So, if the house was the decedent's principal residence prior to death, then the trust would treat it as a principal residence and a principal residence is personal use property and a loss on the sale of personal use property is not deductible on the trust tax return or even the tax return of the beneficiaries if the trust distributes the property to beneficiaries, who, in turn sell it on their personal tax returns, it would be treated the same.  The personal loss is not deductible, but a gain on the sale would be taxable.

The general IRS definition of fair market value is this:

fair market value (FMV) is the price that an asset would sell for on the open market between a willing buyer and a willing seller.

The step-up in basis does not give the beneficiaries do not get a free pass on capital gains on the sale of the property.  It does, however, help make up for the decedent not being able to take the section 121 exclusion on the sale of their principal residence.

The step up in basis does not eliminate all capital gains on the sale of the property, just those in excess of fmv on the date of death.

You can consider that when you sell the house, you may have closing costs to add to the cost "fmv on date of death" basis you are using to show on Sch D against the selling price.  By the time you do that, then you may no longer have a gain.

[NightTreader]

@gloriah5200 

Your feedback is so helpful! Thank you.

After deducting the cost of the sale of the house we are at a loss of about $25k from the FMV, which we determined based on the Comparative Market Analysis our realtor gave us within six month of the decedent's death.

A few more questions:

1. The home sold nine months after decedents death, so is the "alternative FMV date" needed since it's past the six months period?
2. The home was a primary residence, yet it was not a primary residence for the beneficiaries between the time of the decedent's death and the time it sold. So does it become an investment then?
3. If the use is not "primary residence" to the beneficiaries AND it was a loss, can the beneficiaries deduct the $3,000 maximum as a capital gain loss on their personal tax returns?
4. Also do I need to file Form 706? And if I do, is there a penalty with it being late, since I am doing this after the six month time period?  

Thanks again!