I am preparing the final 1041 for a small estate where the parent's home was sold at a loss. The estate made no income. I've prepared the Sch. D and planned to divide the loss between the 4 beneficiaries. However, one of them has no income and will probably never get any use from the Capital Gains loss (about ($4,300)).
Question is can that one person not get a K-1? If so, how does one do that and would the other 3 beneficiaries now divide the CG loss between them (about ($5,723)?) There is a communication problem between the siblings and if asked, the one with no income might refuse to sign off. Thanks.
The trustee issues the proper K-1 without regard of the recipient's personal tax situation. But I cannot see how receipt of a K-1 reporting a capital loss is going to be a problem for either the trustee or the beneficiary.
If you have a capital loss and no income or very little, none or little of the carryover loss is used. People think that every year 3k of the carryover loss is used up no matter what, but this is not the case. I think if your AGI is less than the standard deduction or the personal exemption, can't remember which, then none of the capital loss is used up (regardless of the -3000 on line 13).
You cannot make the election to split the income/deductions between 3 of the 4 beneficiaries.
There is no loss to pass through to the beneficiaries unless the home was converted to income producing property or at least an attempt was made to convert it to income producing property. One can't take a loss on personal use property.
I understand that one can't take a loss on Personal Property. However, this home was inherited and not used for personal use by anyone between the time of the last parent/owner's death and the sale of the home - it was property of the estate. The IRS phone help line told me that the LT Capital Loss can be passed onto the beneficiaries with the only question asked being 'did the home have 'personal use' between the last parent's death and the sale - answer was 'no, it sat vacant waiting to be sold.'
I can't site the reg that says that, but it makes sense that it's not personal property anymore since it belonged to an estate prior to the sale and wasn't passed onto any of the survivors.
What I think might have been incorrect advice from the IRS help was that, even though ($3,000) in LT Capital Loss goes to ln. 4 of the 1041, the LT Cap. Loss Carryover had to be reduced by that $3,000 even though there was no other income (lines 1 thru 9 form 1041.) I maintain that with no income to use against the ($3,000) the carryover should not be reduced by that amount.
As usual, no matter how polite or how you try to reword the question, the person at the IRS refused to accept my reasoning and merely continued to reiterate the written instructions before them.
So line 11C of the 1041 shows ($4,293) or 1/4 of the sales price of $40,000 minus the adj. basis of $57,169 or ($17,169). The software didn't deduct $3,000 from the LT Cap. Loss and I believe that is the proper treatment. TIA
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). 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 you intend to permit a beneficiary to live in the residence rent-free and then distribute it to the beneficiary to live in), 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.
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I believe this backs up your response. I questioned the loss as well, but this supports taking it. Joe
Off Topic - as we frequently copy paragraphs from the IRS PDFs - I discovered that by dropping them into Evernote, you can highlight a paragraph and not have the adjacent ones get copied as well. My only edit above was for the dashes from linebreaks.
The issue is whether the estate was ever actually the owner of the real property under state law.
I'm pretty sure there is no problem if a trust was the owner of the property.
On the other item, I think it is pretty straightforward to claim that the property was held for investment use, as long no beneficiaries ever lived in the house and there was no personal use.
Bottom line, taking the loss for the estate could potentially be challenged.
I picked up a related tip recently: if you hold the Alt key on your Windoze keyboard while making the mouse selection in Adobe Reader, it will also allow just one paragraph on a multi-column page to be selected. So, no need for an extra program like Evernote.
Thanks Joe. I waded through Pub. 559 along with several others, but missed that section. I found two comments by others which supported it, but were still quite ambiguous. I feel much better now.
Can't be done. Doesn't matter if they can't use it. The beneficiary still gets his/her share.
First of all, the loss only passes through upon termination of the estate. So, if this is not the FINAL return for the estate, there is no loss for the beneficiaries. (IRC Section 642(h)). You did say this was final, but are you certain it is?
It needs to change character before any loss could be recognized. (IRC 691 and regs/court-cases.) A personal loss is not deductible (IRC 262).
(a) Personal use property bought long ago for 200k, value at time of death
500k Transferred to estate, and elect to NOT qualify for step up of basis (and no estate tax rule) Estate rents out the property for 6 months,depreciation 10k Estate has long term capital gain of 300k when the house is converted to a rental, 1/4 transferred to K-1 of each beneficiary on 1041 House sold 6 months later for 450k So the estate has a business gain of 450-500+10=-40k, ie. a loss of
+40k, 10k transferred to K-1 of each beneficiary but only on final
1041
(b) Personal use property bought long ago for 200k, value at time of death
500k Transferred to estate, and elect to use estate tax (with $5 million exemption, so 500k house value added to estate) Estate rents out the property for 6 months,depreciation 10k Estate has no long term capital gain (though they may be estate tax) House sold 6 months later for 450k So the estate has a business gain of 450-500+10=-40k, ie. a loss of
+40k
(c) Personal use property bought long ago for 200k, value at time of death
500k Transferred to estate, and elect to use estate tax (with $5 million exemption, so 500k house value added to estate) One of the beneficiaries starts to live in the house Estate has no long term capital gain (though they may be estate tax) House sold 2 years later for 600k So the estate has a long term capital gain of 100k, 1/4 for each beneficiary, but the one who lived in the house has it tax free assuming section 121 is still around in two years.
(a) and (b) have a clear change in the property's usage, so that has already been dealt with.
(c): With the beneficiary living in the house, are you certain the property isn't considered distributed? Therefore, the estate may have no reportable transaction upon subsequent sale - but the beneficiary [and only that beneficiary] may. As for the 121 exclusion, if the property were still considered to be owned by the estate or all beneficiaries as joint property, if one qualifies, then the exclusion aplies to all. Though I can't cite anything specific, I believe that there is precedent for such an outcome (research is needed to confirm).
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