Capital gains question

[L.S.]

Have a question on a 1041 - estate. Have a personal residence owned by deceased - now in the estate and executors are renting out the house - then the house will be sold. Normally if the house was sold - no capital gains tax due. Will there be capital gain tax due on this house sale? Is there a certain length of period where house sale is exempt from capital gains?

Thank you.

[jainen]

>>Is there a certain length of period where house sale is exempt from capital gains?<<

No, the estate can't use Section 121. But presumably there was a basis step-up on date of death (depending on how title was held). That will probably eliminate all or most of the capital gain anyway.

[OldJack]

But since the estate is converting it to rental property there will be a business gain (form 4797) subject to ordinary income treatment from "Nonrecaptured net section 1231 losses from prior years". Any gain after ordinary income would flow to 1040 Sch-D for gain up to "Unrecaptured Section 1250 Gain" at a max tax rate of 25% and if any other gain is left then at a max tax rate of 15%. Your clients should be made aware that renting the property could be undesirable compared to just selling it for 15% max tax on any gain.