How to report sale of inherited overseas real estate

[MommaTraveler]

Husband owned real estate property in his sole name overseas (vacation home).
Husband died in 2023

Wife inherited the house via the US Will

US Will had to be probated overseas;  probate received in November 2023

House put on the market in December 2023

House sale completed July 2024

Title of the house was not transferred to spouse; house was sold via the estate
House was not primary residence of husband and/or wife.  It was a vacation home.

Total estate was well beneath the amount required for a 706 Estate tax return!

Form 1041  (initial) was submitted to IRS for 2023 tax year as there was wage/vacation pay income to the estate, but no other income.

How does surviving spouse report the sale of the property?  No 1099-s issued as the property is overseas.  Just a completion statement from the overseas attorney. 

[pk]

@MommaTraveler ,  my understanding of the situation ( based on your post )

1. H  owned  property abroad;

2.  W acquired the property via inheritance;

3. Property was never  transferred  ( wife chose  cash ? ) and therefore disposed of by the Estate;

4. Wife received cash in-lieu of  asset.

5. Estate went through probate in the US ;  Thus there was an EIN and  a 1041  filed ( initial )

Thus  I think then easiest would be for the Estate  recognize the sale and the distribution  ---   the asset value  stepped up to  FMV  at the time of  demise of the decedent ---  via  final 1041.   And issue  K-1s to the inheritors.   There is no gain or loss in the disposition of the foreign asset  -- for US Tax Purposes.

On your  own return for 2023 you filed joint and depending on the situation you may be eligible to file as widow / head-of-Household  ( depending on facts ) for 2024.   You recognize the K-1 on your 2024 return but it may have no effect .

btw -- which country was the asset located in ?

Is there more I can do for you ?

My condolences on  your  great Loss .

[MommaTraveler]

Thank you, @pk

You are correct in your understanding of 1-5.

Asset is located in the UK. 

If we file 1041 and issue a K-1 for the distribution, will that mean I am taxed on those dollars?  I shouldn't be as inheritances between husband and wife are tax free, as I understand it.     This isn't really income to the estate as the property already exists within the estate. 

[pk]

@MommaTraveler  there is no tax on inheritance  in the USA -- thus  for  assets  belonging to the decedent, there is  step-up of the basis to Fair Market Value -- no capital gain generally.

Does that answer your query ?

[MommaTraveler]

Yes, I understand that there would be no tax to pay as the FMV is what the house sold for.

But, if we complete a 1041 it asks for Income and Deductions.   The asset already belongs to the estate, so it isn't really external income.   How would that be represented on the 1041?

If there is a K-1 issued, wouldn't that have to be reported on my sole tax return?  And wouldn't it show as income, when actually it's just inheritance and thus non-taxable?   

Confusing!  

[pk]

@MommaTraveler  the simplest would be for the Estate to show sale of the asset with no-gain/noloss -- basis equal to FMV and sold at FMV .  Then  on K-1 it shows the distribution of the resultant cash to you.  Since this is cash on your K-1  shown as distribution  from the decedent's estate to you there is no taxable income.

Thew other way would be for you to recognize the asset as yours acquired  by way of  inheritance with Basis as FMV, you sell at FMV and therefore no loss/gain for you on your personal return.

I would think that  the fact that you never transferred the title to your name, may make it easier for the estate to recognize the sale.  However, if you are also the  executrix of the Estate and beneficiary, whether you sold it or the Estate sold it makes no difference ( but the Estate sale may make it cleaner -- especially if you are in  a state like  California where the Trustee/Executrix  is generally prohibited from having any ownership  role while performing the work of the other role  ( but again it depends on the  facts and circumstances ).

If you  want I can research this area  more or call  on one of our experts on the subject (   Domestic Trust / Estate ).

pk

[MommaTraveler]

You are very kind, @pk!

My daughter is the Executrix . An error, we discovered, was made when writing the will that neither my husband nor I caught!   We intended for each other to be the executor, and then our daughter after the last of us to pass, but she was named as Executor to begin with!   Totally our fault for not noticing it!   It's a bit tricky in some respects because she lives overseas, but we liaise easily with each other and so it's really not that big of an issue until it comes to needing  wet signatures.  

In any case, the estate sold the house and so I believe technically the estate has to report it.   Either way, I will owe no CGT or income tax because I am the sole beneficiary;  it's just figuring out how to best report it so I don't get taxed.  I guess I will need to get a CPA to do my taxes for me next year.   If your Trusts/Estates folks have any ideas, I'm open to hearing them!   I'd rather prepare my own taxes with TT if possible! 

This year, there was a tiny bit of "income in respect of a decedent" so we had to do a 1041, and then issued a K-1 to me, which went onto the 1040 as taxable income.   (It was vacation pay that was paid out a couple of months after my husband's death).