Purchase Money Trust Deed - Installment Sale filed as only 4797, and a dead dad. Is he and the estate elected out of 6252 and what does that entail?

[Kaycontop]

So my dead dad entered into a Purchase Money Trust Deed with a previous renter in Late 2019, he received payments for it until he passed in March of 2020, and the estate has been receiving those payments since his passing and will continue to do so for 13 years. So on his very last taxes he worked on in 2019, he reported the sale under Form 4797 for it's full sale price and capital gain, despite it qualifying for Form 6252, and therefore was taxed for the full capital gain he experienced.

Now on the IRS website it says:

Publication 537 - Installment Sales

How to elect out. To make this election, don’t report your sale on Form 6252. Instead, report it on Form 8949, Form 4797, or both.

Form 6252 (Installment Sale Income) Instructions

Don’t file Form 6252 if you elect not to report the sale on the installment method. To elect out, report the full amount of the gain on a timely filed return (including extensions) on Form 4797, Form 8949, or the Schedule D for your tax return, whichever applies.

So when it says elect out, what does that mean?

That the direct to bank account payments from the buyer don't need to be reported as income because my dad has already reported the capital gain on the property and paid the taxes on it?

My poor understanding of selling a house is that what you pay taxes on is the capital gain, the difference between what you paid for it and investments into it vs the sale price. I sold the house he was living in through the estate and so far looks like I will be paying no capital gain taxes on it, because it was sold so quickly after his death and from it entering the estate the FMV barely budged. This is despite it also being a rental within the past two years, he only having moved into it in Early 2019.

If this other house had been fully paid off by his previous renter that day I would be done reporting to the IRS on it, so I just am really trying to understand if there is more to report because of how he originally filed it and being elected out of something.

Any guidance from experts would be helpful.

-A lost mid-20s Personal Representative just trying to do everything myself as much as possible the way he taught me

[M-MTax]

So he sold a rental and then you sold his home that was in the estate? There's nothing you can do about how he reported the sale on his 2019 return because he DID elect out of installment treatment.....he COULD have reported the sale on an installment basis but he chose not to....that's that. The estate will have no gain if his home was sold for its FMV on the date of his death BUT you will have to report the sale so the IRS knows there is no gain......otherwise all they see is gross proceeds from the sale.

[Kaycontop]

I appreciate the reply.

So I have no issues with the fact that he did sell the one rental house without electing to report it as a installment sale 6252, just trying to figure out do I need to: A. report the continued payments from the seller financed mortgage like if it was a 6252; B. just the interest in interest income section of the return as the principal was already reported; or C. because he reported the full sale price including anticipated interest, not have a need to report the income somewhere in his final personal and the estate's income taxes.

The house I sold that he passed away in is already accounted for in the taxes I have prepared so far. I just need to figure out the requirements to input the payments for the one he sold before his death.

(It's not a big enough of an estate to have to worry about estate tax.)

[M-MTax]

The last one....C.....because he opted to report the full sale price and full gain. BUT, if the estate will continue to get interest the interest obviously needs to be reported.

[Kaycontop]

So if I understand, for his individual it's 0, then for the estate I should calculate the amount of each payment I've received since his death that is not towards the principle?

It says on the 1099-INT not to put interest from seller-financed loans in there, should I just put it directly in the 1041 form as interest income?

And while I have you here, because I really do appreciate some feedback, when I distribute the estate within 2021 and the payments come to my bank account, would I again just put it in as interest income on my 1040 for next year's taxes?

[M-MTax]

If it's interest you have to put it in as interest income. If it's principal you don't even have to enter it anywhere because your dad already reported the sale and the gain.