1041 FINAL

[TAXMAN]

Attempting to gather facts for a final 1041 in which the real estate was sold at a loss from inventory value to a non relative. What can I do with the utility bills paid by the estate during holding period to sale date? Was never a rental. Brain a little fuzzy now. Thanks

[michaelmars]

add to basis, likewise taxes insurance etc

[mcb39]

Heirs are allowed to claim a loss on inherited real estate so add all expenses to basis including fixup costs, realtor fees, etc.

[jainen]

>>add to basis, likewise taxes insurance etc<<

This treatment has been recommended several times on this forum, but I remain skeptical. Do you have any actual citation to a reg or ruling that allows it? Even an unofficial source like a standard tax guide might explain under what circumstances and in what manner utility bills, property taxes, insurance, etc., can be capitalized. Where does this idea come from?

[michaelmars]

NO citations handy, but inherited property is considered investment property so those items are to maintain the investment.

[jainen]

>>inherited property is considered investment property<<

No, that is not always true. Depends on how the estate uses the property. The original post contains no suggestion that this real estate was held for investment; in fact, the word "inventory" means quite the opposite. If it was investment property, the estate might elect to capitalize carrying charges such as taxes and interest (assuming acquisition debt), because they are otherwise deductible. The original post was about utilities, and as I read it not even for capital improvements or expense of selling..

[kcjenkins]

I have to ask, Jainen, why would not the utilities during the time they were attempting to sell be considered "selling expenses"? It's much harder to sell a house if the utilities are off. I too was a bit confused by the use of the term 'inventory value', but perhaps taxman merely meant the value that the appraiser for the estate put on it? But even if it was 'inventory' in the hands of the deceased, that would not make it inventory for the heirs

[jainen]

>why would not the utilities during the time they were attempting to sell be considered "selling expenses"?<<

The Instructions for Form 8949 say you can include (in column G) "any expense of sale, such as broker’s fees, commissions, state and local transfer taxes, and option premiums." All these examples relate directly to the specific sales transaction itself. The utility bill was due whether the house sold or not.

Michaelmars suggests utilities are an investment management expense. I'm just asking if someone can cite any authority for that position.

[TAXMAN]

TP included the real estate in inventory on the court house document that list all aseets at time of death. Real estate was merely held and repaired in order to sell. Will gave ADM power to sell. It was that TP need utilities on in order to repair and show property. I THINK (without a cite) these expenses could be basis or expenses to repair and sell. If this be the case it(utilities) would still push basis around. What is the consenses of the board? Thanks. Property was never rented. Was TP residence untill she died.

[mcb39]

My understanding is that costs that are added to basis are only costs of additions and other improvements that have a useful life of more than one year. Also, special assessments for local improvements and amounts spent after a casualty to restore damaged property. Expenses must add tothe value of the home, prolong its useful life or adapt it to new uses.

Costs that maintain the home in good condition but do not add to its value or prolong its life are non-deductible and are not added to the basis. (Quickfinder Handbook page 7-15)

[kcjenkins]

Fix-up expenses have always been allowed as an adjustment to basis on a sale of real estate. All of them would normally have a useful life longer than a year and add to the value of the home, or why do them? What you have, if I understand you, is a personal residence of the deceased, which was 'fixed up' to sell, after her death?

However, given that fact, you don't really need the expenses, do you? Since the sale was shortly after the death, there should be no gain or loss. The sale would establish the FMV of the property. Now, you could either subtract the fix up expense from that, to arrive at FMV before the repairs, then add the repairs as fix up expense. Or just use the sales price.

[jainen]

>>Fix-up expenses have always been allowed as an adjustment to basis on a sale of real estate<<

Again, I ask for your SOURCE because I don't think this is true. Until 1997, when the 250K/500K exclusion replaced the home rollover rules, Form 2119 had a line for fix-up expenses incurred during the last 90 days prior to sale. The 1996 edition of Pub 523 said, "Note. You deduct fixing-up expenses from the amount realized only in figuring the part of the gain that you postpone. You cannot deduct them in figuring the actual gain on the sale of the old home." [http://www.irs.gov/pub/irs-prior/p523--1996.pdf]

[kcjenkins]

I think we are having a confusion of terms here. What I assumed [yes, I know, but I had to make some in order to answer at all] was that the repairs were significant since they apparently took some significant time. and based on that assumption, I would cite Pub 523:

Increases to Basis

• Additions and other improvements that have a useful life of more than 1 year.

• Improvements These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and other improvements to the basis of your property.
  

The following chart lists some other examples of improvements.

Additions

Bedroom

Bathroom

Deck

Garage

Porch

Patio

Heating & Air Conditioning

Heating system

Central air conditioning

Furnace

Duct work

Central humidifier

Filtration system

Lawn & Grounds

Landscaping

Driveway

Walkway

Fence

Retaining wall

Sprinkler system

Swimming pool

Miscellaneous

Storm windows, doors

New roof

Central vacuum

Wiring upgrades

Satellite dish

Security system

Plumbing

Septic system

Water heater

Soft water system

Filtration system

Interior

Improvements

Built-in appliances

Kitchen modernization

Flooring

Wall-to-wall carpeting

Insulation

Attic

Walls

Floors

Pipes and duct work

Edited September 12, 2012 by kcjenkins

[jainen]

>>we are having a confusion of terms<<

At least I agree with THAT. The rest of your post does not reduce the confusion. Why are you citing something about assessed property taxes? And casualty?

Taxman never suggested the estate made capital improvements. He said the utilities were "to repair and show property." I don't think expenses are deductible under either of those reasons. I'm trying to keep an open mind, but you should be able to support your position if it is actually allowed under the law. If you can't find it in a reg or ruling, at least point us to something about repairs in a standard tax guide, like Marilyn did, or an IRS pub, like I did.

[kcjenkins]

I don't know what happened to my post, Jainen, I posted a much longer cite from that pub, it was there when I posted it, now it's gone?!?

The missing parts were the relevant part!

· Additions and other improvements that have a useful life of more than 1 year.

[jainen]

>>it was there... now it's gone<<

Yeah, I know--I've been feeling that way myself these last few years.

Now that you have repaired your post, I understand your basis for it. I'm sure it will have a useful life of more than a year.

Let's move on to a related topic that I rarely see discussed. It's the paragraph immediately following the chart you posted from Pub 523. "Improvements no longer part of home. Your home’s adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home." Doesn't that mean, for example, that if you increase the basis of a building by the cost of a new roof, you must also decrease it by the cost of the old roof?

[TAXMAN]

I see all the post comming in. The original question? What do I do with the utilities bills during administration of the estate for which the estate eventually sold at a loss?We will be filing a 1041 first and final. Thanks

[GeneInAlabama]

>>Doesn't that mean, for example, that if you increase the basis of a building by the cost of a new roof, you must also decrease it by the cost of the old roof?<<

Looks like Jainen has opened up a whole new can of worms. I'm anxious to see how this tunrs out.

[jainen]

>>see how this turns out<<

I'll start a new thread for "calculation of basis."

For Taxman's original question, several answers have been proposed. The tax professional will need to decide the best treatment, considering the specific circumstances including the taxpayer's overall situation and even attitude.

My position is that utilities are not deductible, and Marilyn changed her mind to agree, but our citations relate to a personal residence. Michael thinks utilities can be deducted or perhaps capitalized as investment management expenses, but he doesn't offer any citation. KC thinks utilities can be capitalized as improvements in some situations, Along the way ideas were floated about costs of selling, etc.

[kcjenkins]

Actually, focusing on the utilities, I'm now inclined to think they could be considered 'administrative' costs. I don't think that the heirs just have to absorb them, but it's a toss-up, seems to me, whether they are part of the cost of the improvements, my original position, or part of administrating the estate, my alternative position.

[grandmabee]

I think the utilities are admin cost and are deductable to the heirs on final return under Misc deduction subj to 2% I would not add to basis of house.,