Discussion:Form 1041 Sale of Residence
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| {{ForumReplyPost|UserID=Kevinh5|Date=6 February 2007|Text=I agree, I was referring to the term "Fiduciary Accounting Income" on line 8 of the 1041 Schedule B. For an estate, this is "0".}} | {{ForumReplyPost|UserID=Kevinh5|Date=6 February 2007|Text=I agree, I was referring to the term "Fiduciary Accounting Income" on line 8 of the 1041 Schedule B. For an estate, this is "0".}} | ||
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| + | :''Some 2007/early 2008 posts from non-tax-pros, and related responses, were moved to [[Discussion:Sale of inherited property|Sale of inherited property]].'' | ||
Current revision
Discussion Forum Index --> Tax Questions --> Form 1041 Sale of Residence
| 22 January 2007 | |
| Let me begin by saying that I own a small tax business in Georgia and have never done a form 1041 before. I have read a lot about this form because I have a friend that will probably need me to fill one out for her this year. I use RCS Taxslayer which has a 1041 module included. Here's my friend's story:
Mother died in 2006 leaving her property to each of her 7 children equally. One of the children wanted to purchase the property and a price of about $80,000 was agreed to amongst the 7. My friend and a brother are the Executor and Executrix of the will. They went to an Attorney that was not a real estate attorney and he told them when the check was received from the buying brother, an estate checking account needs to be opened to disperse the funds. This was done with each heir getting the same share. The decedent died in 2006 and the funds were disbursed in 2006. As I understand the form, my friend needs to complete k-1s to give to her siblings notifying them of amounts to be included on their tax returns. The beneficiaries are to pay any income tax on their share of the income. However, I am concerned if they should file a form 1041 at all. If so, am I correct that the taxable numbers will come from the completion of Schedule B? I don't want to have to do a lot of research if this is something that's not taxable, though I would think if the estate has a gain, it certainly would be. I value the opinions put forth here and hope that someone can help me. I am open to any and all advice. If I am missing something, please share this as well. Thanks. BJ | |
| 22 January 2007 | |
| What part of GA BeeJay? Did you know the people who write TaxSlayer are in Augusta area?
This is assuming house was left to 7 children in a will, and not by some sort of joint ownership or living trust. | |
| 22 January 2007 | |
| BJ...I will assume that there is a will that exists that spells out the inheritance to the lucky 7. The issue is to determine if an estate tax return (Form 706) needs to be filed for Mother. Upon her death her assets step up to fair market value so the children inherit the property at its FMV. Since they sold the property and assuming the $80,000 was the fair market value, there is no gain to any of them. The estate had income of $80,000 for the sale of a property so should file an initial and final 1041 (assuming the administration of the estate was complete by 12/31/2006...if not dont make it a final return). The basis of the property will be equal to the $80,000 and you can disclose on Schedule D. I would also check the law regarding trust taxation in Georgia as I have no idea about those rules. | |
| 22 January 2007 | |
| No. This is not a sale. There is no arms length transaction. Price paid is not necessarily fair market value. This is actually a distribution and an exchange. Gain can be recognized, but not loss. If you file a 1041 with a Schedule D you will be suggesting that buyer's basis is $80,000. May not be true. The 1041 will report any income the money earned before distribution and can deduct and pass the cost of transferring the property as an administration expense necessary to effect distribution. | |
| 23 January 2007 | |
| Hi Kevin: Thank you so much for your response. I live in Decatur, which is a suburb of Atlanta. Yes, I know the Taxslayer folks are down the road from me. Whenever I have the slightest problem, they are always there to walk me through.
I told my friend that the Attorney was supposed to issue 1099s but he told her he didn't have to. Glad to know that I am still up on Real estate sales. Yes, the house was a conveyance by will. Chris: Yes, everything was distributed by 12/31/2006. So, an initial and final return can be done at once, I presume. I will be getting down to the nitty gritty as soon as she sends me the settlement statement so that I can know if there's a breakeven situation, or a loss or gain on the sale. I remember asking her to get the value of the property at death. This is when they had it appraised, so this part of the tax situation should be easy to determine. Then there's Dennis, who I've come to enjoy reading his comments to us that are not in the know on a lot of things. Ok, I am going to print all of this out so that I can have all of my facts at hand. You say this is a distribution and not a sale. Hmm. I suppose it's a distribution because the property was actually inherited via will by the 7 heirs-correct? Is this why the Attorney didn't feel the need to submit 1099s to the heirs? Of course, you couldn't know what he was thinking. Scratch that. Ok, I need to read more, work through the 1041 and return here, and get last minute instructions. One thing though, if it's just a distribution, does this mean that the entire amount by each is taxable excluding all of the administrative costs? You guys are the best. Thank you so much. It's nice that none of the answers bring confusion--just more research. BJ | |
| 23 January 2007 | |
| Dennis,
I believe there is a sale someplace in this transaction...either from Estate to heir or from other heirs to buying heir. You can't tell what the recipient's basis until you know if the buyer received any portion of the $80K proceeds. Also, just because the parties are related doesn't mean that it's not sale. The real concern is whether it represents fmv. More facts are necessary, but having opposing interests is a good fact to have. | |
| 23 January 2007 | |
| If you have an appraisal and a psychological need to pay taxes you can have a sale between related parties. Sec. 267 | |
| 5 February 2007 | |
| Dennis, et al--I am back. I have all of the details about my friend's 1041.
Mom passed: 3/5/05 Value of home: $93.000. Will states that home to be sold and proceeds divided amongst 11 heirs. Home sold in 2006 (estate set up in 2006) for $75,000 to one of the heirs. Each heir received $6035 as his/her share. My friend still has not closed the bank account. There's about $61 in it. Asked why she didn't close it once the distributions took place. She forgot. Ok, so now, what are the options since the house was sold at a loss to a releative. I suppose a 1041 is still required, but is this a sale or not? Since the estate is still open, I know that the return will be an initial one and the final one done when she finally closes the account. I noticed that Dennis says this is a distribution and an exchange, but that a loss is not recognized. So, will I just do a 1041 indicating the distribution and leave it at that? I have my books with me today and should be able to follow along with your answers. If this is a simple process--what would you recommend the fee is? Again, thank you so much for your guidance. I appreciate each of you. BJ | |
| 5 February 2007 | |
| I would consider it being the initial AND final return, because $61 is not material - it is de minimus. | |
| 5 February 2007 | |
| There is no de minimus. All means all. On the other hand you still have a 2/28 fiscal. | |
| 5 February 2007 | |
| Estate was set up in 2006. Therefore, I assume that is when the home was put up for sale. (or was it on the market). The value was stated as $93,00 but sold for $75,000 the following year. Was this an arms length transaction or a bargain purchase. You want to be able to support the prior rather than the later. | |
| 5 February 2007 | |
| Hi all,
Jctmstx: Correct, the home went up for sale in 2006 after the will was probated. They began trying to sell the property in 2005 (the estated Fed ID was not applied for until 2006 when there was a buyer). I think because of the area and no immediate takers after almost a year--the estate accepted the offer of the brother. As I understand an arms length transaction-a transaction between related members but treated as unrelated parties for purpose of the sale. If so, everyone involved (all 11 members) received the same fianacial consideration once it was decided what the sale price would be. I don't think it was a bargain sale to give the brother an advantage. There were no takers at $93,000. Ok, so is the estate still open or not? I have been given two unlike opinions on this. In addition, no one is telling me if the 1041 can show a loss with 1099s issued to the heirs. Perhaps, because I wasn't as clear as I should have been with my questions. Of course, if this isn't a sale, I would think there would be no need for schedule D for the heirs. Please clarify for me. Again, I appreciate all of your comments. BJ | |
| 5 February 2007 | |
| I would say there is no loss. How are you going to prove there was no gift since the price was never lowered to assertain the true FMV. (ie: the price was to high to sell (The appraisal obviously was not truly representative of the FMV of the property.)If all cash is distributed and no property remains file the final estate tax return. | |
| 5 February 2007 | |
| Why do you say there was no loss? That is a truly good question. I have no idea how they are going to prove it. This will be something that I will add to my notes and point out to my friend. They did try to sell the house earlier in the year and was offered less money AND asked to make improvements which would have resulted in a much larger loss. All funds have been distributed and no property remains. All debts related to the estate have also been paid.
Seems that you are saying the FMV and the sale are one in the same. IRS will want to know the value at death--they have paperwork showing the appraisal at higher than sales price. This should be so simple, but it seems it isn't. I guess my best bet is to work through form 1041, since this will be my first one, and apply the code as I understand it from researching the information.
BJ | |
| 5 February 2007 | |
| An appraisal is just an "educated guess" of FMV. If they couldn't sell at that price within a reasonable time, then the appraisal was obviously off. The expenses of sale can still be deducted as administrative expenses, though. You would want them to be on a final return to get any benefit from them to the beneficiaries. | |
Taxpro@bts1040 (talk|edits) said: | 5 February 2007 |
| The 1041 estate was created on the date of death. Since there were assets in the estate, a TIN is needed for the estate. The 1041 estate can elect a fiscal year that began on date of death or can elect a calendar year. If the only asset is a house and will be sold within a year of death, I generally choose the fiscal year so I can do an initial and final return all at once. It appears the only income received was the house sale proceeds. Forget for a moment that the house was sold to a relative. FMV on date of death was $93,000 therefore establishing basis. (By the way, was there an official appraisal for that amount, or simply an educated guess by someone in real estate?) Let's say that the house was appraised at $93k, sold the next week for exactly $93k LESS sales commisions, closing costs, etc anounting to $10,000. The 1041 would be filed showing the $93k sale, $93k basis AND sales expenses of $10,000, thereby creating a $10,000 capital loss. This loss can be passed through to the beneficiaries on a pro-rata basis on the Final K-1 for the estate.
Your real quandry here is the reduced sale price to the family member. If there were no takers after the property was adequately marketed for a period of time, you have to ask if the relative actually did get a "gift" on the sale. Let's say the property was worth $87,000 by the time it was put up for sale due to a declining market, and then closing costs would have brought the net to the estate down to $83,000. The estate would have received the benefit of the $10k loss. If that relative paid to the estate roughly the same as what the estate would have realized from a non-related party, then there was no gift or discount to that family member and the estate would recognize the $10,000 loss which would be passed through to the beneficiaries on the Final K-1. Documentation will mean everything in case of audit! We see this happen on a relgular basis when the house is sold immediately after death. Unless the seller is the surviving spouse, the estate will recognize a loss in the amount of the selling costs. | |
| 5 February 2007 | |
| Taxpro, your comments completely disagree with SCA 198-012. | |
| 5 February 2007 | |
| Kevin, That was one of the more helpful documents I've come across on this site. Thanks. | |
| 5 February 2007 | |
| Kevin,
That is so interesting. I had downloaded the same info from The Free Library today. Read it at lunch and am taking it home to read and understand tonight. Thanks. BJ | |
Taxpro@bts1040 (talk|edits) said: | 6 February 2007 |
| Interesting reading. However, I would refer to 1041 instructions over this document. This property ceased to become a personal residence at the time of death when there was no surviving spouse. Ever try to claim sec 121 exclusion on a 1041? You can't, because an estate can't have a residence. The property became investment use property at the time the estate acquired it. If it's not personal use or business use, it must be investment use.
What if the executor had decided to hold onto this property for 10 years because the executor believed real estate values were headed up? Would this property held for 10 years be considered investment use? Of course! What if it was held for only 10 months instead? Does that change things? Do you step up the basis of stock to FMV on date of death? Of course you do. If the executor sold stock held by the decedent, bought a house and sold it later for a loss, is that a capital loss to the estate? | |
| 6 February 2007 | |
| Taxpro,
I am not sure about the answers to your questions but I am trying to learn. As I stated when I started this thread, I have never done a 1041 before but I thought it would be something that I could do. I still believe that. I am not new to tax preparation--just new to estates and trusts. I love the diverse suggestions and appreciate all of the help that you and others have tried to give me. There's a lot of written information available to me and I am trying to take advantage of that. I thought this forum would lead me in the right direction in my search to properly prepare my friend's return. I do need to know more and will continue my quest about my question and apply my newly acquired knowledge in a way that I hope will result in an accurately prepared return for my friend. Thanks to each of you. Have a great tax season. BJ | |
| 6 February 2007 | |
| Taxpro, an asset purchased by an estate is different than an asset left to the estate. Does an estate hold the labrador retriever as an investment? | |
| 6 February 2007 | |
| Under that assumption, all the dog food and vet bills would be administrative expenses. That would be a great estate planning device: leave your pets to your estate, the 706 could deduct the expected cost of maintaining the pets, leaving less to be taxed! And if the estate's furry "investments" produced a litter of puppy-chow eating machines, even less tax!!!
| |
| 6 February 2007 | |
| Actually if the property was in the process of being sold at time of death and the executor's actions are considered ministerial the §121 exclusion is indeed available on Form 1041 and there is no step up to market value. The major point of the Brookhaven study leading to SCA 198-012 was that the majority of individuals preparing 1041's had no idea what they were doing. Tax(pro?)'s comments about an executor holding property for ten years as an investment, for example, shows outstanding ignorance of Surrogate's Court procedures. | |
| 6 February 2007 | |
| Dennis, this is actually a constant discussion when I teach estate 1041 classes around the US. The IRS has not been consistent, and, just like for individual returns that aren't audited, people start to believe that "If the IRS did not disallow it, it must be correct." So I do think it is normal that we professionals may have different opinions on this subject. | |
| 6 February 2007 | |
| More pertinent is the fact that for the most part taxation of estates and trusts is dependent on treatment under individual state law. You cannot competently prepare a 1041 without an understanding of Fiduciary Accounting and Surrogate's Court procedure. | |
| 6 February 2007 | |
| I understand, (but FAI is only on a trust), (and in some states it is called Probate Court.) The whole point of the SCA was that it DID depend on local law (whether the loss was the estate's or the beneficiaries'). | |
| 6 February 2007 | |
| Fiduciary accounting applies to estates as well, most particularly in the case of real and tangible personal property, and quite importantly in cases of testamentary trusts. | |
| 6 February 2007 | |
| I agree, I was referring to the term "Fiduciary Accounting Income" on line 8 of the 1041 Schedule B. For an estate, this is "0". | |
- Some 2007/early 2008 posts from non-tax-pros, and related responses, were moved to Sale of inherited property.
| 5 November 2009 | |
| Revisiting this question - I'm completing a 1041 for a client for 2006 - estate is still open (long story), so this will not be an initial/final return. The personal residence of the deceased was sold in 2006 shortly after death (within one month). Using the sale price as the FMV to show no gain/loss. However, in handling the closing costs, I would like to take a deduction for the closing costs in 2006 to reduce the income to the beneficiaries from other sources of income. Closing costs include real estate taxes paid via the proceeds of the sale, attorney's fees, commissions, title charges, inspections, etc. I feel like these are costs associated with being able to effect the distribution of the home to the beneficiaries and should not be considered as a loss from the sale of the residence. I am thinking the taxes and legal fees should be deducted as such, and that the other costs should be administrative costs against ordinary income, since they were necessarily incurred.
From what I've read there, though, and in other places, it seems this is a gray area and that these possibly aren't deductible. At least it still is gray to me. What IS the correct way to handle these??? Thanks. | |
| 5 November 2009 | |
| I just read Treasury Reg Section 20.2053-3(3) where my interpretation is that these expenses can be included as deductible expenses called "other administrative expenses". Does anyone have a different interpreation of this section? (BTW, my client would meet the conditions required to allow this deduction). | |
| 5 November 2009 | |
| OR - is this section referring to the 706 only and not deductible expenses on the estate's 1041? (Please see all 3 of my posts today to get to what I'm asking for - sorry - just trying to think this through and not be helpless!) | |
| 6 November 2009 | |
| just moving this to the front to see if anyone can help me. :) | |
