Purchase Agreement signed on August 4, 2019.
Home owner Bob Doe dies on August 6, 2019.
All attorneys (Bob's; the realtors'; the buyer's) agree that the purchase agreement is binding on the estate.
The house sale closes on September 9, 2019. Proceeds of the sale are deposited into the Estate Account of Bob Doe, Deceased.
The capital gain on the sale is $60,000. The late Bob Doe lived in the house six years.
On which tax return is the capital gain reported: the late Bob Doe's Form 1040 or the estate's Form 1041?
If the capital gain is reported on the estate's Form 1041, is there any exclusion like the one that would kick in if the sale were reported on Bob Doe's 2019 Form 1040?
Before anything else, while the date the agreement was signed is
important, the date of close of escrow is more important.
The issue is whether or not this is "income in respect of a
decedent." The IRS will certainly argue that it qualifies for that,
and as such is taxable to the in the individual's final return.
However in Estate of Peterson v. Commissioner (1911) 667 F.2d 675,
the 8th Circuit didn't agree with the IRS assessment in a similar
case. The court held, among other things, that something is income
with respect to a decedent, "only when the decedent performed all
substantial acts within his control necessary to convert prior
efforts or property into an intangible right to receive income."
In you case I will guess that escrow wasn't close to being complete,
that the buyer's funds had not been distributed there and that the
seller had not signed the deed yet. If the buyer was getting a loan
to buy the property and the loan had not been approved yet by the
lender, that makes it even more contingent, and less likely to be
income in respect of a decedent. As a result, I would think that it
would not qualify as income in respect of a decedent. Rather it
would be capital gain with a basis stepped up to the date of death.
I don't think it would be taxable at all. I have been known to be
wrong about some things - this is a very complex area of the law, and
the answer will at least in part depend on the precise terms of the
contract of sale. But based on the information given, that is my
Thank you once again for what looks like cogent analysis to me, Stuart. I skimmed through the case you cited. You are correct in presuming that the number and breadth of contingencies, before settlement, were significant. For one, the house sale and the buyer's loan to buy the house were contingent upon the buyer getting his own home under contract. (After the seller's death, and to all parties' delight, the buyer did sign a purchase agreement on his own home.) This and other, more mundane, but frequently deal-breaking, contingencies were not removed until well after the seller's death.
I had forgotten about the basis step-up rule. Thank you for reminding me.
Income with Respect to a Decedent is never reported on the decedent's final return. It is reported on the return of the individual/entity that actually receives the income: the Estate, a beneficiary, or another individual who has received the right to receive the income.
The cited case isn't really on point as the dispute was related to contractual terms that were violated by the decedent (by not delivering the calves on time) and certain other considerations that are peculiar to farming/breeding.
In the OP's situation, the house sale would be reported on the Estate income tax return (or that of a beneficiary). Assuming the house was vacant between the date of death and closing, the gain (or loss when closing costs are included) would be long-term. If the house was occupied by a beneficiary/family member post-death, the IRS might argue that the house was personal use property and not investment property and therefore not reportable.
Ira Smilovitz, EA
What gain? Isn't the basis the FMV at the time of death?
Question: is the FMV the sale price, or the sale price less selling
expenses? If the latter, does the estate or the heirs get a tax expense
for the selling expenses?
For a sale that close to the date of death, FMV is the contract sales price. Selling expenses reduce the sales proceeds thereby creating the capital loss. Selling expenses are not a tax expense. That is, they are not a separately stated deduction. They are treated the same as a broker's commission for a stock sale.
Ira Smilovitz, EA
Reinforcing what Ira said about the fair market value, from the IRS's frequently asked questions on Estate Taxes,
Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." [See Regulation 26 CFR §20.2031-1]
Sorry, my last sentence was misleading. I meant to say that the loss on personal use property is not reportable. Any gain would still be taxable. Presumably, there would be no partial exclusion under Section 121.
Ira Smilovitz, EA