Proceeds from the sale of a deceased parent's home

[bkw1962]

My wife's father passed and his home is held within the estate (not bequeathed to or owned by my wife or her sisters). The sale of the home closed this week. The proceeds are to be distributed across the 3 sisters once the remaining mortgage debt is satisfied this week. The estate will not close until sometime in the fall. I have read that this money, because it is the result of the sale of a decedent's home, is not taxable - to either the estate OR the recipients. I have also read that it IS taxable as income to the recipients. And finally, I have also read that the capital gain (or loss) is taxable to the recipients - the difference between the fair market value and the selling price. before we do anything with our share of this money, we need to know what we are liable for. Thanks!

[Anonymous]

the reason your getting some different answers is because it depends on who is doing the selling  and what was done with the house after they dies.   was it rented out.  did it just sit there. 

Sale of decedent's residence. If the estate is the legal owner of a decedent's residence and the personal representative sells it in the course of administration, the tax treatment of gain or loss depends on how the estate holds or uses the former residence. For example, if, as the personal representative, you intend to realize the value of the house through sale, the residence is a capital asset held for investment and gain or loss is capital gain or loss (which may be deductible). (gain or loss  = sales price less FMV at date of death less selling expenses) This is the case even though it was the decedent's personal residence and even if you did not rent it out. If, however, the house is not held for business or investment use (for example, if a beneficiary resided in the residence rent-free), and you later decide to sell the residence without first converting it to business or investment use, any gain is capital gain, but a loss is not deductible.

not let's take it one step further and say that the estate is terminated after the sale  and all assets including sales proceeds are distributed to the beneficiaries.   they should each receive a K-1,   which will report the gain or loss on sale as well as any other taxable items such as interest, dividends. 

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[tagteam · Accepted solution]

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@bkw1962 wrote:

...I have also read that the capital gain (or loss) is taxable to the recipients - the difference between the fair market value and the selling price.

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That is essentially correct; the basis of the property inherited from a decedent is generally the FMV of the property on the date of the decedent's death and that basis would be subtracted from the amount realized (selling price less selling expenses) in order to calculate any gain/loss.

See https://www.irs.gov/publications/p559#en_US_2018_publink100099643

Note that, in this instance, the estate will likely have to file an income tax return (form 1041) to report the sale of the house and it is the estate that will potentially report any capital gain or loss, which will then be passed through to the beneficiaries on Schedules K-1. 

See https://www.irs.gov/publications/p559#en_US_2018_publink100099689

[todd_in_minnesota]

In this situation, where is the state income-tax liability?

E.G. When the estate sells real estate in 'state A', and then the estate closes, if the income from this sale is distributed to individuals residing in 'state B' and 'state C', is there any state income-tax liability in 'state A' (state where the sale occurred), or only in 'state B' and 'state C' (where the recipients reside)?

Many thanks in advance for this clarification!

[PattiF]

Each state has its unique filing requirements and differences in what is taxable income. What are States A, B, and C?

@todd_in_minnesota

[rktrout8699]

Your wife inherited the property. Inherited property gets a step-up in tax basis to to its value and her parent's date of death. Therefore, the only gain that would be taxable would be an increase in value from the parent's date of death to that date of sale.

Hope that is helpful.

[todd_in_minnesota]

Hi Patti,

The estate sold the property in Colorado.

Proceeds from the sale were distributed to surviving children in California and Minnesota.

Common sense says there's no 'income' in Colorado, as none of the recipients reside in Colorado, but I'm interested to hear your response.

Thanks!

[tagteam]

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@todd_in_minnesota wrote:

The estate sold the property in Colorado.

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Then see https://tax.colorado.gov/estates-trusts

[todd_in_minnesota]

Yup, thanks - we're clear on the taxes owed/paid by the Estate, and those have been filed in Colorado.

This question is specifically about individual income taxes on distributions from the Estate to individuals not residing in Colorado.

The executor/personal representative for the estate resides in Minnesota.

They have distributed cash from the estate to residents of Minnesota and of California.

Is this income taxed in Colorado?  in Minnesota?  in California?  or other?

Thanks for the answers!

[tagteam]

If there happened to be capital gain (or other income) that was distributed to the beneficiaries, then they wuld report that (via their K-1s) on their federal income tax returns, which would most likely have an impact on their state income tax liability.

[todd_in_minnesota]

Exactly - we've gotten that far, and included the K-1 in our federal.

Turbotax software seemed to expect there was some personal (not Estate) tax liability in Colorado even though the 'income' was solely realized in Minnesota...

I'm checking with this forum to get confirmation that the only state due 'income tax' on this distribution is the state where the recipient resides (Minnesota), and NOT where the estate distributed the money (Colorado).

If anyone sees any personal income tax liability in Colorado from this distribution, please let us know!

Thanks again.

[tagteam · Accepted solution]

If the estate had any tax liability to Colorado and paid any tax due, then the beneficiaries would have no personal income tax liability to Colorado.

[todd_in_minnesota]

Brilliant.

Many thanks for the confirmation!