Does Estate or Beneficiaries Pay Capital Gain Taxes

[JxSs_97]

I am working on the estate taxes for my mom’s estate.  The only beneficiaries are myself and my sister. We sold her house and have a capital gain on the selling.  Does the estate pay the tax on the capital gain or does this need to be passed to my sister and I  through the K-1s?  If the estate pays the capital gain tax and there is no other income from the estate do I need to create K-1s for myself and sister? If no K-1s need to be generated is it necessary to enter any beneficiary info in TT?   -Thanks

[DavidD66]

The estate can choose to pay the tax; however, if you want to distribute the proceeds then you will report the gains on the beneficiaries K-1s.  If the estate pays the tax you should still enter beneficiary information and issue the K-1s, even though they will have all zeros.    

[zeelimit]

If the title to the house was in your mom's name, then her estate acquired the house (for tax purposes) when she died. The sale should be reported on Form 1041 by the estate. There should not generally be a tax on the sale since the basis of the house is marked-to-market at death. That is, if the estate sells it before the house appreciates further there is no gain or loss. 

[JxSs_97]

DavidD66, thanks for the response! Some follow-up questions:

Just to clarify ...when you say "proceeds", do you mean the capital gain amount (i.e if the capital gains was $20,000 then the proceeds equal $20,000)? 

If I understand your statement, when the proceeds are distributed to the beneficiaries, they pay capital gains tax on the $20,000 and not the estate?

If the proceeds are split equally between the two beneficiaries, $10,000 on their respective K-1, is the capital gain tax each beneficiary pays based on $10,000?

Thanks

[PatriciaV]

Proceeds generally means the gross sales price - what the seller paid for the property less commissions and other selling expenses. When the estate makes a cash distribution to the beneficiaries, the total would be split according to their respective shares of the estate.

Capital gain would be the net taxable income from the sale (proceeds minus cost basis). As DavidD66 said, if the estate pays the tax on the gain, the K-1s would report no income. But if the tax isn't paid by the estate, the gain is reported on Schedule K-1 to the beneficiaries and would be taxable income on their personal returns.

Think of it this way: If the estate pays the tax out of the proceeds, the distribution to the beneficiaries would be proceeds less tax. If the income is reported to the beneficiaries, they would receive more of the proceeds but have to pay the tax out of the distribution.

This may not be relevant if, as zeelimit mentioned, there is no taxable gain from the sale - and therefore no tax to be paid.

[Jsherron85]

Just to gain further clarity...

Aunt passed June 9th 2023

Probate is getting ready to file final accounting 

House sold by estate in June 21st 2024.

Sold for 229k

Cost dod 220k

Selling fees $10,093

Capital loss of $1,093

Executor picked fiscal year of June 9th, 2023 through May 31st 2024 (No 1041 because no income for estate)

Fiscal year June 2024 through May 31st 2025 will show income from house sale (1099s substitute form 229k house sale)

Beneficiaries will receive a k-1 showing capital loss regardless of them receiving the proceeds from this house?

[zeelimit]

I don't think that the capital loss from the sale of the house is deductible. If it was used as a personal residence then it is likely to be disallowed as a personal loss. You don't mention the house being used as a rental property. 

[DianeW777]

Yes, a capital loss is allowed for the sale of inherited property when the taxpayer/beneficiary did not live there as their main home. It is considered as investment property and the information will be received on the K-1, then entered into the tax returns.  This loss will offset any capital gains and then other income depending on the tax returns of the beneficiaries.

@Jsherron85 

[Jsherron85]

Thank you! Are they entitled to the full loss or just the 3k?

[DianeW777]

It depends on their other income. If there is a capital loss and there is no capital gains to offset it, then the loss will be allowed to offset other income up to $3,000 and then any balance will be carried over to the next tax year until used up.

@Jsherron85