Taxable status of reimbursements from Estate

[josephmarcieadam]

For the last 20 years, my wife and I managed the property in Pennsylvania, left by her mother for the use of the siblings. This included real estate taxes, utilities and major physical repairs. For the first 4 years I requested the other siblings contribute a share towards the taxes, which they declined to do.  At no time were any family members not given access to the property as needed. Last year we notified them that if no one was willing to take over responsibility and/or needed a place to live we were putting the house on the market. 

The house had no mortgage, and my mother in law died without a will. The family agreed to follow her wishes and keep the house so everyone would have a place to live if needed. Several family members did make use of that house for up to 3 years over this period. They all also signed off on letters of administration to give my wife legal responsibility for the estate.

Now the house has sold and the total out of pocket over 20 years comes to @ $113,000. 

In filing the original estate tax the probate lawyer assigned $2000 to my wife as administor fees. As i understand it that fee is taxable as income. What about the reimbursement money?

Is this money taxable to us as income?

We have receipts for everything.

[Opus 17]

If the question is, what do we do to be treated fairly, the answer is "see an attorney."  There is no easy way now to deal with 20 years of ownership expenses.

If the question is, what do we do in 2025 to not make waves with the family, but get paid for our expenses, then you still need to see at least an accountant.

If the estate owned the home (and it was not owned by the siblings -- the title remained with the parents or the estate and it was never re-titled to each sibling as a co-owner) -- then the estate needs to file a tax return for 2025.  The estate should list all expenses (from 2025 only, I'm afraid) against income from 2025.  The estate should reimburse you for any taxes, fees, maintenance costs, etc. that you paid to maintain and sell the property.  This reimbursement is tax-free.  If you are paid extra as a management fee, that is taxable to you.  The estate tax return would show the income (capital gains from sale of the property), the expenses, and issue a K-1 statement to each heir., along with each heir's proceeds after expenses.  The estate would also issue you a 1099-MISC (I think) for your management fees, but not for reimbursements for estate expenses that you paid.  

If you already issued checks to the other heirs without thinking about your expenses, it may be hard to claw that back without hurt feelings.  You need to talk to an accountant, or an attorney or maybe a different attorney if the one you used didn't already help you with this. 

[M-MTax]

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@josephmarcieadam wrote:

In filing the original estate tax the probate lawyer assigned $2000 to my wife as administor fees. As i understand it that fee is taxable as income. What about the reimbursement money?

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The fiduciary fee is reported as miscellaneous income not subject to self-employment tax.

You should, rightfully, be reimbursed from the estate for the expenses your wife paid on its behalf. 

[cnstolper]

The key question is what items did you get reimbursed for. If they were expenses related to the maintenance of the house, the reimbursement would not be taxable. If they were related to an upgrade of the  house, those expenses would be added to the basis of the house and your reimbursement would be taxable (capital gains) as an early withdrawal of the basis. In the end, you would be neutral on total  taxes but the timing would be different. The Estate is the taxpayer, not you

[Hi Palms]

OP indicated $2000 was assigned to his wife as administrator. That's a fiduciary fee. That's miscellaneous income. Reimbursement for estate expenses paid would be non-taxable.

[josephmarcieadam]

Thanks ! We have a probate attorney and an accountant for the estate. My wife doesn’t want to ask them this question as she feels it’s a conflict of interest. Initial estate returns has been filed both state and federal. I’m the son of a CPA and a nurse so I have kept scrupulous track with receipts of money spent on behalf of maintaining the property ( in nursing school they pound into your head : if you didn’t document it, it never happened) 

the property has not generated any income  until the sale of the property. 

[josephmarcieadam]

Thank you! The significant expenses of upkeep were seeking reimbursement for wouldn’t , in my estimation, be considered upgrades - there were major plumbing leaks that required the replacement of the main sewer line, and the replacement  of a wall in the living room. Also needed to replace basement stairs which had dry rot

[Opus 17]

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@josephmarcieadam wrote:

Thanks ! We have a probate attorney and an accountant for the estate. My wife doesn’t want to ask them this question as she feels it’s a conflict of interest. Initial estate returns has been filed both state and federal. 

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Your wife should ask all the questions.  If the other professionals think it's a conflict, they will say so.   

[Opus 17]

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@josephmarcieadam wrote:

Thank you! The significant expenses of upkeep were seeking reimbursement for wouldn’t , in my estimation, be considered upgrades - there were major plumbing leaks that required the replacement of the main sewer line, and the replacement  of a wall in the living room. Also needed to replace basement stairs which had dry rot

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An improvement adds value to the property, adapts it to a new use, or extends the useful life of the property or one of its systems.  Improvements are distinguished from repairs and maintenance, which keep the property in as-is condition.  

Typical improvements are things like new roof or new flooring or new furnace.  However, a new sewer line (instead of patching the existing one) would definitely be considered an improvement.  A replacement wall (if there were structural defects) and replacement stairs could go either way, depending on the exact situation.

If this is happening in 2025, you should submit a bill to the estate for reimbursement for cost you paid for the benefit of the estate.  The estate administrator decides whether or not to pay (yes, there can be conflicts here, which is why estates are sometimes supervised by the courts.  And why you should ask for the reimbursement and then get your answer, rather than not asking at all.  The attorney can tell you what the process is for getting reimbursed if you are also the administrator approving the reimbursement.)

The reimbursement will not be taxable for repairs, and is probably taxable as a long-term capital gain if it is for an improvement (due to how improvements are handled -- this will also affect the capital gains calculation on the sale of the house).  The fiduciary fee is definitely taxable.

Then after the reimbursements are paid, the remaining proceeds are divided.

Unless you already divided the proceeds, in which case it may be impossible as a practical matter to get reimbursed even if you are arguably entitled. 

[Hi Palms]

No conflict here. Your wife is entitled to be reimbursed from the estate, to the extent possible, for personal funds she expended to maintain, repair, or improve estate property. She's also entitled to a reasonable fee for serving as Administrator to the extent that fee is approved by the probate court.