Taxes owed in Real Estate Sold then Distributed

[Allan712]

Hello. My Father passed away in January of 2021. He owned his home ( Paying Mortgage till death). I was named executor of his account. It took approximately 8 months to get the home ready to sell. The house sold 11 months after My fathers death. We sold the home  as quickly as possible. The FMV was  ( or was listed at) $198,000. The Payoff of the Mortgage was approximately $89,000. Once the the Mortgage was paid off the Amount paid to The Estate of My father was approximately $84,000 that was distributed to My self and My siblings. I Received the Form to File the Taxes on behalf of the estate which I did through Turbo Tax and the amount said that was owed was $0. I never heard from the IRS about it, until a Few months ago stating that I was to report it as income? I wrote back and Explained that The Estate Sold the Home and the proceeds were distributed. The said since that was the case, I needed to report My share ( and the potential of it being taxed) and to re adjust my 2021 taxes. Is this right? Would My siblings still owe as Individuals despite Filing the taxes under the estate?

[tagteam]

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@Allan712 wrote:

I Received the Form to File the Taxes on behalf of the estate which I did through Turbo Tax....

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The threshold questions I have are: Exactly what did you file and what was reported? Also, how did you distribute the proceeds to each beneficiary?

It appears as if a Form 1041 for the estate (tax return for estates and trusts) should have been filed to report the sale of the house. In that event, the return should have been shown the basis of the house (the fair market value on the date of your father's passing, most likely) and the sales price less selling expenses). 

If the 1041 showed a gain on sale, that gain could have been passed through to the beneficiaries on K-1s (1041) or the estate could have paid any tax due. 

From the facts you stated in your post, it appears as if something went wrong, somewhere, with the reporting of the sale, most likely, centering around the figures that were reported and how they were reported.

[Allan712]

I filed based on the form I received from the Title Company. I used Turbo Tax Business as they have the option to file for the estate.

[Allan712]

Oh, And I had an estate account created through My Bank in order to cash the check and then distributed via bank transfer to one sibling and cashiers check to the other.

[tagteam]

Did your 1041 show a gain or a loss on the sale (or breakeven)?

Did you issue K-1s to the beneficiaries?

[Allan712]

I did not give Myself or Siblings a K-1 the Proceeds from the house was $84,000 or so. I have move since the filing so Not sure where the 1040 is. So I'm not 100% sure of a "Gain" but we did spend some to fix the place up.

[rjs]

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@Allan712 wrote:

The Estate Sold the Home and the proceeds were distributed.

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The estate did not distribute the proceeds of the sale. It distributed what was left of the proceeds after paying off the mortgage. Is that the amount that was reported as the proceeds of the sale on the Form 1041 estate tax return? When the sale is reported, the amount that has to be reported as proceeds is the full selling price, before paying off the mortgage. The mortgage payoff does not reduce the taxable gain from the sale.

From what you wrote, it sounds like the amount reported as proceeds of the sale was not the correct full amount. There may have been other problems in the tax reporting as well.

[tagteam]

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@Allan712 wrote:

I used Turbo Tax Business as they have the option to file for the estate.

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It appears, then, as if you filed a 1041, but you made an error in terms of reporting the correct figures from the sale (incorrect basis or sales price, most likely, if you deducted the mortgage payoff).

You need to locate the 1041 (or get a copy from the IRS) and make the corrections (or consult with a local tax professional). You also need to respond to the notice from the IRS in a timely manner or they will simply make a final tax assessment.

[Opus 17]

The proceeds have nothing to do with what is actually taxable.  The gain is the difference between the adjusted cost basis and the selling price, regardless of any mortgage.  The estate gets a stepped up basis on his death, so if the FMV was really $198,00 and the selling price was also $198,000, then there is no gain and no capital gains tax is owed by the heirs, regardless of the amount of cash that is realized.  

It sounds like the IRS learned of the sale, and assumes (as they are allowed to) that the proceeds are taxable unless you prove otherwise.   It sounds like you failed to file something.   Sometimes, if no capital gains  tax is owed, TurboTax will tell you that you don’t have to file the form with your tax return. This can be true in some cases, but if there was a 1099S issued at the closing, you must file and report the sale even though there is no gain. In other words, you have to show your work, and put on paper that there was no gain. Without showing your work, the IRS is allowed to assume that the sale was taxable. 

At this point, it might be sufficient to send the IRS a written explanation, or you might need to file an amended tax return.  It’s hard to know exactly without having the full picture.

[Hal_Al]

@Allan712  said: "I filed based on the form I received from the Title Company."

  Was it a form 1099-S? Was it in your name and SS# or the name of the estate and the tax identification number for the estate? An estate's tax identification number, also called an employer identification number (EIN),

[NCperson]

@Allan712 there is a lot of back and forth in this thread...... and maybe you can add more facts to what you already wrote.

What should have occured is that the Estate was the seller of the home.  The capital gains should have been the sales price less the selling expenses less the market value on the date of your father's passing.  Unlikely there was a gain.  The mortgage balance has nothing to do with this.  

That gain (or loss) should have been recoreded on Form 1041 and then a K-1 should ahve been distributed to the beneficiaries.  They then report their share of the gain (or loss) on their personal tax return.

is that what occured?  as asked by others, whose SSN / EIN was listed by the title compamy as the seller?