Form 1041 Sale of residence

[David]

Decedent met the principal residence gain exclusion. I thought that the exclusion passes to the beneficiaries when reporting the sale on Form 1041.

 

It appears from my research that the exclusion only applied to decedent's passing away in 2010.

 

Did I miss something and the beneficiaries DO get the gain exclusion?

 

If the 4 beneficiaries do get the exclusion do they split $250K or $500K exclusion? I would think they will split $250K.

 

Thanks for your help.

[Gail in Virginia]

Instead of the beneficiaries getting the personal residence exclusion, they should get a stepped-up basis.  There may not be any gain since the estate's basis in the residence is the value at the date of death (or 6 months later if the alternate valuation date was elected.)  For most estates recently, this has meant a slight loss once the closing costs were factored in since even though real estate values have recovered somewhat they are not trending upward in any great hurry.

 

At least this has been my experience.

[David]

Yes, that has usually been my experience as well. However, in this case there are gains from the sale of a principal residence and a second home even using the step up basis. DOD was 11/3/11 and the sale of both homes was in 2014.

 

I was thinking the beneficiaries would get the principal residence gain exclusion - that the exclusion would carry from the decedent to the beneficiaries. However, it appears that that isn't the case. I just want to be sure I am not missing something and that the beneficiaries DO get the gain exclusion.

 

The estate was closed 7/31/14 and the personal representative distributed all funds to the beneficiaries.

 

In this case the gains from sale were distributed to the beneficiaries. Since it is the final tax return are the gains distributed to the beneficiaries and the tax paid by the beneficiaries?

 

FYI - I am preparing a 1/1/14 - 7/31/14 final 1041.

 

Thanks.

[Christian]

Would not the capital gains be treated simply as long term gains on the sale of inherited property

with any tax due being paid by the heirs ?

[David]

Yes, but I need to know if the principal residence gain exclusion passes from the decedent to the estate and eventually to the beneficiaries for the sale of the principal residence.

 

I thought it would but it appears from the my research that the exclusion doesn't pass to the estate or beneficiaries.

 

I need to confirm this before I tell the personal representative that the beneficiaries will owe for the capital gain on both the principal residence and the second home.

 

Thanks for your help.

[michaelmars]

http://www.zinnerco.com/Portals/141641/docs/selling_a_decedents_personal_residence-feb2012(1).pdf  see if this article is of any help!!

[David]

Thanks, Michael.

 

When I read the instructions and the regs it appeared to say that only if a decedent died in 2010 did the beneficiaries/estate get the principal residence gain exclusion.

[kcjenkins]

That's my reading of the code, David.  They get the cap gain. 

[Lion EA]

The decedent did not reside in the house after death.  (I hope!)  The estate never resided in the house.  Did any of the beneficiaries reside in the house?  The house was not a personal residence after DOD, unless one of the benes moved in.  No personal residence exclusion.  Was the house rented for profit?  Step up or down.  Inherited = long-term capital treatment.

[David]

Oh great. The link that Michael sent says that after 2009 the beneficiaries get the exclusion.

 

I already gave the return to the personal representative and e-filed it. Hopefully, it will get rejected because I can't e-file a 2014 return yet. Then I can re-do the return.

 

This is going to be bad, having to go back to him and tell him the return is not correct because I am stupid. He was in a hurry to get the K-1s to the beneficiaries so they probably have them.

 

I guess I shouldn't second guess myself.

[David]

Anyone ever had a situation like this and maybe can give me some suggestions as to how not to look too stupid when I tell the personal representative that the beneficiaries don't get the gain exclusion?

[Lion EA]

Well, 2010 was an oddball year.  So a little confusion re a 2011 DOD is understandable.  Blame it on the changing tax law, and remind them that no one's perfect.  Forcing 2014 into your 2013 software, because they were in a rush.  You'll fix it now.  Blah, blah, blah.  Say it with a sincere face and offer them a discount next year (or this year if they haven't paid yet).

[jklcpa]

David, I've been trying off and on today to find something for you that says the exclusion is still available to be used against gains on sales by estates or heirs, but I believe Lion is correct.  This exclusion WAS available in 2010 only, and that's why the first linked document says "for sales after Dec 31, 2009".  As far as I can find, in 2010 this was covered in IRC sec 121(d)(9) , that frustratingly now reads as something completely different.

 

If you look at this site, on page 4 of the right-hand column, in very fine print you'll see the amendments for 2010, the temporary additions of the words that would have extended the exclusion to estates and heirs. It's the last line of that first block in the amendments section. Hope that makes sense. Here's that site for the actual code:

 

http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapB-partIII-sec121.pdf

[kcjenkins]

Oh great. The link that Michael sent says that after 2009 the beneficiaries get the exclusion.

 

I already gave the return to the personal representative and e-filed it. Hopefully, it will get rejected because I can't e-file a 2014 return yet. Then I can re-do the return.

 

This is going to be bad, having to go back to him and tell him the return is not correct because I am stupid. He was in a hurry to get the K-1s to the beneficiaries so they probably have them.

 

I guess I shouldn't second guess myself.

Nope, you were not wrong.  That old link is correct, at the time.  But it changed again after 2010.

[David]

I was wondering if the article was an old article but didn't see any dates anywhere. Foolish me assumed it was a current article.

 

Judy, I appreciate you checking to see if the exclusion still applies.

 

Thanks everyone. I guess I'll bite the bullet and let the client know.