Sale of residence by estate

If the residence was first converted to an income-producing use, such as a rental, yes.

If a beneficiary lived in the residence, then no.

Otherwise, definitely maybe. The IRS position is no, but there have been some court cases on this where it was successfully argued that the estate gets a stepped-up basis on the property and the expense of sale then becomes a deductible loss, typically passed through to the beneficiaries.

In your case, it sounds like you are talking about an actual decrease in market value rather than just expense of sale, but the result should be the same.

-Mark Bole

The residence does NOT have to be converted to anything but investment property for the capital loss to be deductible.

Deductible by the estate up to a maximum loss of $3000 against the estate's taxable income. A net capital loss stays with the entity until its final year. Only then can any remaining capital loss be passed through to the beneficiaries.

The estate can pass on capital gains to the heirs - why not capital losses?

Stu

As Alan indicated, it *can* pass on capital losses, but only in the final year.

My (admittedly limited) experience with this involved capital loss solely due to expense of sale (real estate commission, etc), and since it was the final year of the estate, all the loss was passed through.

I don't disagree with Bill Brown's clarification, but will add that according to my research resource, it comes down to facts and circumstances, and converting to a rental is one income-producing use that the IRS most likely would *not* challenge.

-Mark Bole

Sec. 643(a) and its Regs. Also see the instructions for completing Schedule B of the 1041.

Deductible by the estate IF an estate return is required to be filed, which doesn't happen very often. Therefore the gain/loss passes through to the heirs.

ChEAr$, Harlan Lunsford, EA n LA, on the way to Baltimore tomorrow

I'm not sure how you define "doesn't happen very often." That said, it only takes $600 of gross income to trigger an income tax return for an estate.

I got some grief from a fellow tax preparer once over the basics of this issue, so if anyone would care to confirm my understanding of the following or set me straight, much appreciated.

1. "Gross income" only includes the *gain* from a sale (not less than zero), not the gross proceeds of a sale.
2. Because of stepped up basis on inherited property, the gross income from a sale shortly after death can easily fall below the estate filing requirement level of 0 (the point I think Harlan was making).
3. Receipt of a 1099-S Copy B (Proceeds of Real Estate Transaction for Transferor) does not by itself trigger any filing requirement (estate or individual), no matter the amount - it is the gross income (gain on sale) that is used to determine filing requirement.

Is there some practical benefit to filing an estate/trust return not otherwise required, simply to ward off inquiries from the IRS about a

1099-S that never matched a return filed with them, or to start a statute of limitations clock, or to provide heirs (and the IRS) with Schedule K-1's connecting the estate's tax ID with the individual filer's tax ID?

Similarly for a stock sale with little or no gain, and a 1099-B issued under the tax ID of the estate or (erroneously) the decedent -- is filing not necessarily required but a good idea anyway?

Incidentally, in some other thread a long time ago I asked about IRS instructions for nominee forms other than 1099-INT and 1099-DIV. I finally found what I was looking for, namely page 64 of Pub 550 (2007) specifically mentions nominee filing of Forms 1099-B and 1099-S, which in the above discussion would eliminate one of the possible reasons for filing a return not otherwise required to be filed (showing how the amount reported under one tax ID really belongs to another).

-Mark Bole

Last time i visited this issue re a client, it was rather clear. Here's what transpired.

Client had died two and a half years earlier, and daughter and siblings had kept the house vacant since then. When they sold it, and visited the lawyer for settlement, he asked them if Jimmie (my client) had used the house as a personal residence. Yes, for maybe 20 years or more.

So he had Mary, the executrix, sign a form that attested to this fact to support that it was the sale of a personal residence and therefore no form 1099S had to be issued.

Since Jimmie's death the house had appreciated in value, and even after selling expenses there was a gain.

I doubt that she (not my client because I told her otherwise) ever reported it the right way. After ALL , the lawyer told her it wasn't necessary.

ChEAr$, Harlan

Mark Bole wrote: [snip]

Statute of limitations. You never know what can come crawling out from under the bed.