Capital Gains

[jberry2020tax]

My Aunt passed away October 2021. I sold her house this year. Can her estate claim the one time tax break and not pay capital gains tax on the sale of the house. We live in Texas.

[Anonymous_ · Accepted solution]

The home sale exclusion does not apply in this instance.

Rather, the gain (loss) would be measured by the difference between the sales price (less selling expenses) and the basis (typically the fair market value on the date of death of the decedent, your aunt).

See I.R.C §1014

[mjwoo94015]

Thanks for your response. I happen to agree with your conclusion but have not found any authority for this position. Do you have any authority or case law that you are relying on other than the plain reading of the law?

[DMarkM1]

I don't believe there would be any case law only statutory law since the provisions posted by @R-SchuleCPA never came into play.  If you follow the notes in the law (here) and read the referenced Public Laws and amendments you will find that subsection (d)(11) which was originally (d)(9) was enacted in 2001 but was only to affect property of decedents dying after Dec 31, 2009.  However, on Dec 17, 2010 Public Law repealed subsection (d)(11) formerly (d)(9) for decedents dying after Dec 31, 2009.  

As @Anonymous_ states the using the step up basis on the date of death is the correct method.  

@mjwoo94015   

[Anonymous_]

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@mjwoo94015 wrote:

I happen to agree with your conclusion but have not found any authority for this position. 

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The Internal Revenue Code and Treasury Regulations are authority for the position stated. 

There are rules of precedence and court cases that clearly contradict statutes and regulations would be quickly overturned at the appellate level. Further, and generally, the only court decisions the IRS would be absolutely bound to follow, would be U.S Supreme Court cases and final decisions of U.S. Courts of Appeal (where Cert has been denied by the Supreme Court).

It is also not clear to me why any taxpayer would prefer Section 121 treatment over Section 1014 since the latter does not have a dollar limitation. For example, if a decedent had a basis in a primary residence of $100,000 and the property had a fair market value of $750,000 on the date of death, the home sale exclusion would (if it were applicable) exclude $250,000 of the $650,000 gain while Section 1014 would effectively shield all of the gain.

[mjwoo94015]

The question was being posed as to whether you get both the step up basis on date of death and the 121 exclusion, which might have kicked in if the actual sale by the estate did not occur until a year or two later and the resulting sale resulted in a capital gain even after the step up in basis. I believe that if the repeal of the 121(d) (9) provision eliminates the estate from claiming the 121 exemption, then there is no statutory position for the estate claiming the 121 exclusion. however, I just  wanted to confirm that you are not entitled to both exclusions just in case.

[Anonymous_]

Not to get too technical, but the EGTRRA had a sunset provision and the section to which you are referring was only applicable for the 2010 tax year (the "carry-over basis tax year").

The reason for the aforementioned was that the estate tax was basically repealed for that year and, along with it, the stepped-up basis (no estate tax means the decedent's property is not included in the estate for federal income tax purposes which, in turn, means Section 1014 does not apply - a decedent's property must be included in the decedent's gross estate in order to get a step up in basis). The offset for this was the allowance of the home sale exclusion for estates.

[mjwoo94015]

I appreciate your technical explanation and legislative background for the statutory repeal of 121(d)(11). This all makes sense in context and so there is no statutory basis for the taxpayer to claim both the step up in basis and the 121 exclusion as Congress intended to  only provide one benefit. Since the Estate Tax was reenacted in 2010, the step up in basis is the only benefit to the Estate (just to be clear, the Estate does not have to be a taxable estate (as long as the asset is included in the gross estate) to get the step up in basis. Thanks for the clarification in advance.

[Anonymous_]

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@mjwoo94015 wrote:

.....the Estate does not have to be a taxable estate (as long as the asset is included in the gross estate) to get the step up in basis. 

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Yes, I understand. I was only trying to point out the fact that there was no such thing as a taxable estate in the 2010 tax year, which was the reason I referred to that tax year as the "carry-over basis year" and without the prior Section 121(d)(11) provision, there would be absolutely no relief for a primary residence that was acquired from a decedent.

The upshot, or yield, here is that there never was both a stepped-up basis and a home sale exclusion for property acquired from a decedent.