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

[MarilynG1]

@NightTreader It's a good idea to get a FMV written estimate from a realtor around for the date of sale, and keep it for tax records for documentation of how you arrived at that cost basis.

'Primary residence' means for the decedent, NOT the beneficiaries. 

The beneficiaries would not be able to claim a capital loss on their returns, as their investment was $0.  It would be a Capital Loss on the Trust Tax Return Form 1041. 

The beneficiaries would need to report the income from their individual distribution amounts from the trust K-1 they receive on their tax returns.

Here's a detailed article on Form K-1 you may find helpful, plus more info from the IRS on Form 706. 

This link has info for using TurboTax Business to prepare a Form 1041. 

[taxprep4]

Good Morning,

I have a question along the same lines.  A gentleman recently passed away leaving his home and a couple smaller bank accounts to go into his estate.  The brother is set to inherit everything.  The brother plans on using money from the bank accounts to fix the house up and eventually sell it to a family member.  The questions are:

-Does the house step-up to FMV on the date of death?

-When the home is sold (probably two years from now), can the costs to repair the home be used to increase the cost basis to lower the capital gains?

-Would it be more beneficial to transfer the home to the brother's name now, do the repairs, and sell it in the name of the brother?  (The brother inheriting everything has health insurance through the state and get assistance paying for it through NYS of Health)  In this situation the repairs would increase the basis of the home.

-An estate return will have to be filed each year until the home is transferred or sold, correct?

Is there something else that I am missing?  Thank you!

[annamari62]

I saw how the fmv is formulated on a deceased persons property..but could you tell me if ..the executor holds off selling the property for a few years..is the fmv still valid on date of death? or does fmv change after we wait a few years? Anna

[louvallee]

CAN ESTATE TAKE SECTION 121 EXCLUSION  AFTER THE CAPITAL GAINS TAX HAS BEEN CALCULATED USING THE STEP UP IN BASIS ON THE SALE OF THE HOME?

I.E. FMV DATE OF DEATH IS 500,000 ON 02/15/2021. HOME SOLD 09/15/2021 FOR 570,000. CAPITAL GAIN IS 70,000. TAX IS 7,000. CAN HEIRS NOW ADD 250,000 SECTION 121 TO THE STEP UP 500,000 TO AVOID CAP GAINS TAX?

THE ADJUSTED BASIS WITH THE SECTION 121 EXCLUSION IS 360,000. THIS WOULD BE THE BASIS USED IF THE DECEASED WERE STILL LIVING.

[louvallee]

WRONG. HERE IS WHY. THE ESTATE CAN TAKE THE SECTION 121 EXCLUSION 250,000 AND ELIMINATE THE CAP GAINS TAX.

[louvallee]

The estate can take the section 121 exclusion.

[tagteam]

A decedent's estate does not qualify for the Section 121 exclusion.

See Treas Reg. §1.121-1(c)(3)

[golfmomma1]

My mother had a revocable trust which held her personal residence. She passed away in April of 2020. 

Her revocable trust becomes an unrevocable upon death. The trust had no income in 2020 so form 1041 was not filed. We are treating the RT as not part of the Estate.

1.Does this mean we did not take the section 645 election?

2.Do we need to file form 8855?

The RT sold her home in April 2021. Portions of the proceeds were disbursed to the beneficiaries.

3. The RT pays capital gains (if any) on the 2021 return correct?

4. Does the RT send the beneficiaries schedule K1s for the amount of money each beneficiary received from the RT from the home sale?

5. How is this income taxed to the beneficiaries?

6. Can they deduct a portion of the cost basis to offset  the K1 income?

thank you so much!

[M-MTax]

Section 645 election is made if you want to treat the trust as part of the estate. You don't need to file an 8855.

If the proceeds were distributed the gain appears on the K-1s so the beneficiaries pay the tax.

This is long term gain to the benes. The cost basis is deducted at the trust level.

GET HELP from a tax pro.

[nick p]

I am the executor of my mother's estate, and closed on the sale of her house 5 months and 21 days after her death. The house sold for 155,100. If I use that price as the FMV for both the time of her death and sale price, TT business wants to use the 10,200 in closing costs as a capital loss. But, a previous answer said this was not right, as it was her principal residence. It was not used during this time, only emptied and cleaned.

[MarilynG]

Use the FMV as of date of death as the Cost Basis when reporting the sale.

Add Sales Expenses to that amount.  The difference between this amount and the Sales Price is Gain/Loss.  You may have a Capital Loss to report. 

Click this link for info on how to report Sale of Inherited Home. 

[nick p]

will my sale price work as the FMV for the house at her death, 5 months previous. I didn't receive a 1099 on sale of house, and have no other way of valuing it

[tagteam]

You may need a date of death appraisal if you are ever questioned (unlikely, but it can happen).

Regardless, if you have a loss on the sale, you can recognize it since the property was never used for personal purposes after her death.