Decedent Estate - 1041

[Yardley CPA]

I rarely prepare estate returns.  Two siblings and deceased siblings spouse are the beneficiaries.  No activity at all until 2021 when the deceased home was sold by the estate.  Profit is in the 40K range.  Can the estate pay the tax on the gain so that the K1 is distributed with no income transferring to the beneficiaries?  I believe so, but want to make sure.  It's a New Jersey estate.  

Thank you.  

[FDNY]

I don’t do many either but I think in your case you can use the 121 exclusion for sale of personal residence.

I did one in NY a few years ago and was pretty easy with the exclusion.

The estate tax in NJ ended a few years ago for deceased individuals so you’re good there.

[Lion EA]

An estate doesn't have a primary residence, so no 121 exclusion.

An estate has relatively narrow tax brackets, but if the estate sold the house, then that's what it is. It does save any bad feelings due to one beneficiary being in a higher tax bracket than another beneficiary. You'll want to check the will and the laws of the state.

[jklcpa]

2 hours ago, FDNY said:

I don’t do many either but I think in your case you can use the 121 exclusion for sale of personal residence.

I did one in NY a few years ago and was pretty easy with the exclusion.

The estate tax in NJ ended a few years ago for deceased individuals so you’re good there.

Yes, that came in the early 2000s, and I think that has been repealed if I'm not mistaken. 121(d)(11).

[Yardley CPA]

2 hours ago, cbslee said:

Was the house jointly owned or not?

House was owned by all three beneficiaries. 

[Sara EA]

I'm confused.  Was the house sold by the estate (and a 1099S issued in the estate's EIN)?  In that case it goes on the estate return because that's where the IRS computers will look for it.  In your last post you said the beneficiaries sold it.  If so, they should each have a 1099S to report on their individual returns, no estate return required.

If the estate sold the home and distributed the proceeds in the same fiscal year, it cannot pay the taxes because it distributed all its taxable income and has none.  If the proceeds haven't been distributed, do the beneficiaries really want to keep it open another fiscal year just so it can pay taxes (and tax prep for another 1041)?  I agree with Lion that estate tax rates are way higher than most individuals pay so the beneficiaries will get less money than if they each paid tax on their share at their individual tax rates.  Plus, the estate can deduct tax prep fees where the individuals can't.

[michaelmars]

18 hours ago, Lion EA said:

An estate doesn't have a primary residence, so no 121 exclusion.

An estate has relatively narrow tax brackets, but if the estate sold the house, then that's what it is. It does save any bad feelings due to one beneficiary being in a higher tax bracket than another beneficiary. You'll want to check the will and the laws of the state.

Not 121 but does get the step-up.

[Lion EA]

Yes, step-up to DOD FMV. But OP doesn't say when was DOD, how long the estate owned the house. Just that there was no activity in the estate until 2021 when the house was sold. We don't know how much appreciation since DOD.

[Yardley CPA]

Here is some additional information:

- Estate remains open as of this post.

- Date of Death 2018

- the residence was the deceased primary residence for over 50 years. 

- Upon death, the residence was willed to the three beneficiaries.  

- There has been zero activity in the estate since the date of death. The only estate activity has been the sale of that home in 2021.

- FMV at date of death was $320K Sale price was $425K.  There were selling expenses, and improvements to the home were made since the DOD.  

- Determining if 1099-S was issued. 

- Is it safe to assume (and I know what happens when you assume) that the estate will pay the tax on the gain.  Beneficiaries will receive K-1's with basically no income or expenses reflected.  

- Proceeds from the sale of the home will be distributed to the beneficiaries equally, as they are 33% owners.

- Final estate return will be prepared in 2023. 

I would appreciate any other input. 

 

[Lion EA]

I am still unclear. Are you saying the estate owned the house, and the estate sold the house in 2021? Or, are you saying that the house passed to the three heirs via will in 2018, and the three heirs sold the house in 2021?

[Yardley CPA]

Just now, Lion EA said:

I am still unclear. Are you saying the estate owned the house, and the estate sold the house in 2021? Or, are you saying that the house passed to the three heirs via will in 2018, and the three heirs sold the house in 2021?

The information I received is that the home remained in the estate.  Again, I'm not experienced in estate matters but that is what I was told.  

[BulldogTom]

41 minutes ago, Yardley CPA said:

The information I received is that the home remained in the estate.  

The Realtor and Tile Company who handled the sale will be your best friend here.  They can tell you who sold the property (it has to be recorded).   Get the TIN of the seller and most of your answers will follow.

Tom
Longview, TX
 

[Yardley CPA]

12 minutes ago, BulldogTom said:

The Realtor and Tile Company who handled the sale will be your best friend here.  They can tell you who sold the property (it has to be recorded).   Get the TIN of the seller and most of your answers will follow.

Tom
Longview, TX
 

On the closing statement it lists the seller as:

"Sally Doe Executrix of the Estate of Mary Doe Deceased" 

[grandmabee]

Then the estate sold the house.  File a fiscal year 1041 now and take FMV at time of DOD to determine the gain.  less improvements made to the house and selling expenses.  You can also take final estate expenses on the return.  Attorney fees, tax prep fees.  You don't want the estate to pay the tax because of higher expense and they can't anyway.  

[Yardley CPA]

3 minutes ago, grandmabee said:

Then the estate sold the house.  File a fiscal year 1041 now and take FMV at time of DOD to determine the gain.  less improvements made to the house and selling expenses.  You can also take final estate expenses on the return.  Attorney fees, tax prep fees.  You don't want the estate to pay the tax because of higher expense and they can't anyway.  

The estate cannot pay the tax?  The gain has to be split equally on the K1's?  I was under the impression the estate could pay the tax and the K1's would have no income or expenses reflected. 

[grandmabee]

Not on the final year everything is distributed out thru K-1  and also why would you want to?  higher tax on estate.

[Yardley CPA]

10 minutes ago, grandmabee said:

Not on the final year everything is distributed out thru K-1 and also why would you want to?  higher tax on estate.

I appreciate your response.  The estate remains open and will close during 2022 once the proceeds of the sale are distributed.  Since the proceeds have yet to be distributed, the 2021 K1's would be zero and the 2022 K1's would show the gain for each beneficiary, correct?  The 2022 return will be the final return.  

[grandmabee]

Yes,  your year dates would be if only activity is the sale of the house then that could be your stating date and close any time before 12 months.

First and final return.

[Sara EA]

You really seem to want the estate to pay tax on the gain, although posters here are unanimous that this choice will be expensive.  The estate will pay 20% on its gain, plus net investment income tax.  Are any of the beneficiaries in that high a bracket?

The way around this may be to file a fiscal year for the estate.  Say the person died in July 2018.  The fiscal year runs from DOD to June 30 2019, the second from July 2019 to June 2020, the third from July 2020 to June 2021.  If no activity, no 1041s.  If the home was sold and the proceeds distributed between July 2021 and June 30, 2022, you can file a single initial and final return.  All the proceeds and expenses will pass to the beneficiaries, who will likely pay much less in taxes.

Whatever you do, you will have to attach an explanation to the return as to why the estate was open for more than two years.

[Yardley CPA]

Appreciate all the comments.  

All the beneficiaries are in the highest tax brackets.  

Assuming the 2021 1041 return will show the sale of the home on it?  What happens to the gain on the 1041 since it is not distributed to the beneficiaries until their 2022 K1's?   

[Abby Normal]

If there's a capital gain and it's not a final return, the estate will pay taxes on the gain.

[grandmabee]

But again if the sale is the only thing going on, do a fiscal year return as first and final and be done with it.  Check out the tax rates for the 1041 and see what it would be on the gain.

[Abby Normal]

28 minutes ago, grandmabee said:

But again if the sale is the only thing going on, do a fiscal year return as first and final and be done with it.  Check out the tax rates for the 1041 and see what it would be on the gain.

Precisely. I sometimes do calendar year on estates when it's going to be open for more than one year, but fiscal years usually work out better for most estates.

[mcbreck]

On 3/5/2022 at 8:11 PM, Sara EA said:

If the estate sold the home and distributed the proceeds in the same fiscal year, it cannot pay the taxes because it distributed all its taxable income and has none. 

Why would they be prohibited from paying the tax in the final year of an estate? The 1041 shows the required minimum income distribution, it doesn't declare that all other assets have been distributed. Estates have 65 days after the due date to make their income distribution payment anyway. If an estate pays the tax, the required minimum income distribution is $0.

 

Lots of estates and trusts pay the capital gains tax because they don't want disabled beneficiaries showing income on their personal tax return.

[Sara EA]

I have never seen an estate that has a required income distribution, only some trusts.  I don't understand why the estate is hanging on to the money instead of distributing it.  If this is the only remaining asset, there is no reason to do so.  Sometimes estates distribute everything but a reasonable sum to pay accounting and attorney fees, etc.  The estate then closes for tax purposes even though a bank account remains open.  (Yes, an estate can close for tax purposes even though not formally closed by the situs state.)  Sounds to me like the executor is not doing his/her fiduciary duty.

If all the beneficiaries are in the same tax bracket and will pay the same NIIT as the estate, I guess it makes no difference which one pays the tax.