Estate 1041 Sale of Home Questions

[RaiseMyHand_01]

I have printed my Turbo-tax Business Return for Estate 1041 and have a few things I would like to like to confirm before filing.

1. I entered sale of Estate house that was lived in by 1 of the 2 beneficiaries (children of deceased) for 6 years (rent free).  After adding to cost-basis for upgrades to the home and deductions incurred in 2022 for utilities, taxes, homeowners insurance, mortgage interest, and maintenance & repairs, plus township certifications to make the home salable the Form 1041line 4 Capital Gains is positive.  If the Estate pays the taxes due to IRS does that mean that K-1's are not required for the beneficiaries?

2.  There was CASH available in the Estate that was not earned in 2022.  This was distributed to the beneficiaries with their 50% portion of the proceeds from sale on the Estate house.  Given this CASH was available in the original Estate value (CASH) from 2016 how is this handled when it comes to issuing K-1's?

As it stands now my printed1041 documents (using the above $$$,$$$. from #1and #2) are printing a K-1 with no values.  Is this correct?  If yes, should I suppress the print of the K-1's and not send to the IRS or the beneficiaries?

If I'm missing anything else here related, please let me know.  Thank you in advance for the help.

[tagteam · Accepted solution]

1. If the estate pays the tax liability, then the distribution results in being 100% principal and no K-1s would need to be issued to the beneficiaries (there are no items of income, gain, deductions, credits to report). Note that you cannot add everything you stated in your question to the basis since the property was held for personal use (e.g., utilities, insurance, repairs).

2. Distributions of cash would not be reported on the K-1s.

The aforementioned is why you are not seeing any figures populate on the K-1s; you are distributing principal. You can decline to issue and print K-1s with no figures, but you might want to inform the beneficiaries that they have no tax liability as a result of the distributions they are receiving.

[BasBleu_bobcat]

Distribution of assets which the estate owned at the time of the decedents death is not income and no income tax will be due (either from the estate or the heirs).  Instead it is used to value the estate for inheritance tax purposes.  The proceeds from the sale of the house will be inheritance, not income for the heirs income tax purposes.  

I would not expect to generate a k-1 unless you have a 1099-INT or DIV  from the estate.

[tagteam]

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@BasBleu_bobcat wrote:

Distribution of assets which the estate owned at the time of the decedents death is not income and no income tax will be due (either from the estate or the heirs). 

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@RaiseMyHand_01 clearly stated that there was a gain from the sale of the home.

[RaiseMyHand_01]

Okay so for #2, CASH that was part of the original Estate at time of death is never reported on Form 1041, right?  Thus not taxable to the beneficiaries, (2children).

For #1, I followed the instructions for Home Sale worksheet and Form 8949 for Long Term Capital Gains (the Estate home remained in the decedents name from DOD in 2016 until sold in 2022).  I received a 1099-S from the closing attorney and followed the instructions in Turbo Tax.   To clarify no taxes were paid to the IRS at the time of closing.  My question is if the Estate 1041 calculates taxes are due based on the home sale and the Estate pays the IRS the taxes when submitting the 1041then are K-1's required for the additional money distributed to the beneficiaries?

[tagteam]

No, K-1s would not be required in that instance.

[RaiseMyHand_01]

You are saying for my #2 instance outlined with the 1099-S and where the Estate paying taxes on the gain with the 1041 filing then I can suppress the K-'s in Turbo Tax with the filing, right?

Thank you, just trying to get this right.

[tagteam · Accepted solution]

Yes, since the estate is (apparently) paying any tax due.

[PeaceMaker2]

Form 1041, TTEE and Beneficiary are the same person and the only TTEE and beneficiary associated with the Trust. 

2023 Form-1041 will be  both "initial" AND "final" return.

Only asset in the trust was the beneficiary's fathers primary residence, which 50% interest  went into the trust, the other to surviving spouse (father).  The Trust was created 2008, DOD of deceased mother was 2011...no EIN was obtained at the time (shocker..not!)  EIN obtained January 2023 as required.

Sales price $182K (Mar 2023), sales expense, $16K, FMV 2011 ($115k)...everything divided by 2 (50%), resulting in a short term capital gain of approximately $25K.

The home was sold March 2023, 50% proceeds to primary home owner, 50% into trust.  Trust made final distribution of all proceeds in April 2023, Trust s closed. 

No 1099-S is or will be issued as verified by the Title Agency. 

No other assets or dividends or income ever in this Trust.  This was in and out as far as taxable event is concerned.

Question: Should the short term capital gain tax be paid by the beneficiary via K-1 or the Trust?  Does it matter?  The TTEE and Beneficiary are the same person? 

Thank you - I need to get this behind me.

[tagteam]

You have a DOD valuation (FMV on the date of death, apparently January of 2023). 

If the asset was acquired from the decedent (appears to be the case here), then any capital gain would be long term per Section 1223.

[PeaceMaker2]

DOD was was 10/2011....basically... the trust was created to make sure the dying spouse (beneficiary's mother) could pass along her 50% interest in the primary residence to her child, the sole beneficiary.  You know in case "dad" got remarried. 

The trust was created in 2008, she died in 2011, then in 2023 the beneficiary's dad had to move due to age, so the house went up for sale and sold in march 2023, which 50% proceeds went into the trust, then distributed within 40 days from the sale of the house.

Seems like a short term capital gain?? 

Should the Trust pay the tax or the beneficiary?  Does it matter? 

Thank you!!

[tagteam]

Yeah, sorry, I was under the impression that the party passed in 2023. On your facts now, that would be a short-term gain and whichever entity or individual sold the house would have the tax liability.

[PeaceMaker2]

Thank you!

The sale of the house would be 50/50 split between the Trust and the surviving spouse; right?  That is how the checks were distributed.  $83K to the surviving spouse, the dad AND $83K to the Trust, which then immediately distributed a check from the Trust account to the sole beneficiary, who is also the sole TTEE.

I ran two scenarios, and on placed the tax burden on the Trust and the other onto the beneficiary K-1.  From a state tax perspective, I wonder if the latter (passing along the K-1) would be better?  The house was in Ohio, but the beneficiary is in Kentucky.  Any thoughts on that aspect?

I really do appreciate your help, a real blessing.

[tagteam]

If the trust is a grantor trust, then there is virtually no effect on the split or tax burden; it is disregarded for federal income tax purposes.

An income tax return may need to be filed in Ohio since the house was located there (Ohio source income from the sale).

[PeaceMaker2]

It's a complex trust, 2023 is the initial return and final return. 

The original trust was a Revocable Living Trust for the beneficiary's mother.  She passed away in 2011, so became irrevocable. 

No taxable event until house was sold, which occurred when surviving spouse could no longer live in his home and sold the house.

Just found out that Turbo Tax doesn't offer a Kentucky state return for transferring the Federal 1041 to the state equivalent?

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