Tax issue with German estate

[Margaret CPA in OH]

I have read the treaty with Germany and gleaned nothing but a headache. Client is an heir to sister's estate in Germany (they were born there but client is US citizen). There is no issue with inheritance so far as I can tell (not so much anyway), but there was a rental property in play. It incurred a loss between date of death and date of sale.

Client received a letter akin to a K-1, I believe, showing about 13,000 euro loss. I cannot figure out whether or even how to include on the US return. Any ideas?

Thanks in advance!

[DougO]

Not sure that this will apply completely to your situation but I have a client with an interest in a partnership in an Eastern European country and we fill out Form 8865 and include with the 1040 return each year - his portion of gain or loss is carried over and reported on page 2 of Sch E as you would a K-1. You will have to convert the amounts to US dollars on the form. In his case we also are able to claim a foreign tax credit for any taxes paid on the income reported to the foreign country.

Let me know if that will assist in your situation. Doug O

[rfassett]

I am a little confused (of course, I stay that way most of the time, so no big deal). Is this 13,000 euro loss a loss on sale of the property, or an operating loss, or a combination of the two? Is the letter "akin to a K-1" a letter wrapping up the estate? Or will there be additional letters in the following years? Or is it "property sale" specific? Answers to these questions might help us help you sort this out.

[Margaret CPA in OH]

Thanks for replies and my apologies for not being clear. The letter is to document the operating loss on the rental as a rental, not as a sale. The gain/loss on the sale flowed through to the estate. This loss covers the time that the estate was the owner and rented until the tenant moved and the property could be sold to wrap up the estate.

There will be no further letters. The client paid a small amount of inheritance tax to Germany on his share of the inheritance. I didn't think that it would be deductible on his US return because there would not be a tax on the US estate. He is not expecting it to be deductible.

Doug, I will look at the 8865 later today. Off to a meeting now - thanks for the replies!

[joanmcq]

Is your client the sole heir, or were there others? The 8865 is filed for a foreign partnership. If she was the sole heir, it wouldn't be necessary.

[Margaret CPA in OH]

I just checked that form, too. The client is the sole heir of his sister's estate not a partner so the form does not apply.

The meeting I attended today was with a small group of sole practitioners. I raised the question with them. No one had the precise answer but some did raise the question of economic benefit and basis.

I think (dangerous) that the estate owned the property after death of owner/sister of client and continued to rent until tenant moved out. Estate sold property and part of the inheritance included a probable gain on the sale. The German document related to distribution from the estate does not specify character of proceeds. He did pay German tax on his proceeds (they have an inheritance tax) but I don't think he gets a tax benefit in US because the proceeds weren't taxed here.

The loss on the rental would be like the final K-1 of an estate. He never owned the property, the estate did. What happens here in a similar situation? I don't have a K-1 to input, just this German document. Maybe he doesn't get any benefit from the loss at all.

My brain hurts...

The client is willing to not claim the loss which may be correct. But if he is entitled to it, I want to do the right thing, whatever it is.

[joanmcq]

He doesn't get a rental loss if the estate owned the property, but he could take a misc itemized deduction for losses on final distribution. If necessary, find someone who knows German, and have them translate the document.

[Margaret CPA in OH]

Oh right! I think that's the idea I had in the way back part of my brain recalling something about issues when an estate is closed. And I looked over the documents again and found an email address of what appears to be someone at the law firm that handled the estate. I asked if there was an English translation available. I also made copy with names whited out and sent to a native German woman who used to work for me. Unfortunately she lacks knowledge in technical legal terms but I thought it worth trying.

Anyway, I think you are correct that the best scenario is Sch A deduction. The only problem is that there would not be a matchup with a 1041 K-1. We'll see what the German ladies come up with.

Thanks so much, Joan!

[joanmcq]

I do know a CPA who reads German and is looking for contract work; in fact she just had a job where it was translating German invoices. I could hook you up if you would like.

[Margaret CPA in OH]

Thanks, Joan. I have had successful contact via email with my German friend and the legal clerk in Germany. The document actually states that the loss can only offset German passive income (like here) so is suspended until then. Well, he will not have any passive German income so cannot use it. He didn't expect to anyway, so I think that's where it stands.

I will definitely keep you and your contact in mind, though, as I will have these clients for quite a while. They are pretty loyal - I like that!

Thanks again to all for suggestions and help! Now on to the remaining extensions - ugh, the LLC with multiple rentals and less than perfect records, know what I mean?

Have a great weekend -