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Arthur Rubin
Arthur Rubin, Tax Preparer
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Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Hello gaain. I have these questions as I prepare the final

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Hello gaain. I have these questions as I prepare the final 1041 after the property closed May 25 2010. Assume that I am the Executor. Sale of rental property was the only income for the estate in 2010. Gross proceeds 354K. I will reimburse myself 25K that I spent on upkeep, taxes, mortgage, etc after he died before the balance is distributed among us 5 siblings (this has been ok'd by a lawyer):
On the 1041 schedule K-1, am I recording the gross proceeds from the sale as shown on the 1099 S ($354K)and then dividing that among the beneficiaries, or do I just record the capital gain distribution?
How do I treat the 25K I am getting reimbursed so that neither I nor the estate has to pay taxes on it since I had already paid taxes on it when it was earned.
Am I correct that my cost basis of the rental is the FMV at time of death
How, if at all, do I treat the mortgage pay-off (he had a small second mort).
Where on the K-1 do I record the NOL from 2009
Where on the K-1 do I record the recapture taxes I have to pay
I did a preliminary 1041 but it shows a tax due of about 10K. Why does the estate have to pay that tax if the capital gains are getting allocated to the beneficiaries and we will have to pay cap gains tax on that same income when we do our personal 1040's?
Submitted: 4 years ago.
Category: Tax
Expert:  Arthur Rubin replied 4 years ago.
General comment:
The estate will need to use the 2010 laws to file its final return. In general, you would need to use the 2010 forms, but the return is due 4-1/2 months from the end of the month in which the estate closes, so the 2010 forms would not be available. You are allowed to use the 2009 forms, but, if the estate were to have a capital gain, itself, you would need to replace the 2009 numbers on the form by the 2010 numbers. For example, if you were to fill out 1041 Schedule D Part V, you would need to replace the $2,300 on line 24 by the appropriate 2010 number.

The sale is a little more complicated than I thought. If the $354K is more than the value of the property when it ceased to be a rental, and if the value of the property when you put it into service as a rental is at least the value of the property at death, then you apply the general rules for the sale of a business property.

A) You calculate depreciation allowed (or allowable) as the amount reported on the estate's 1040 Schedule E, but limited to the amount required to bring the total rental income to $0. (Even a "profitable" rental is likely to show a rental loss.)

B) You compare the adjusted basis (the value of the property at death, plus post-death improvements, less depreciation) to the sales price less commissions.
The form 4797 instructions inform you exactly where on the form 1041 and schedules you report the detail.
1) If you show a loss, it's an "ordinary" loss, reported on the estate's 1041 line 7.
2) If you show a gain, it's a capital gain, reported on 1041 Schedule D. The part of the gain corresponding to depreciation on the property is section 1250 gain, which is not quite as favorably taxed as "ordinary" capital gains. The part of the gain corresponding to depreciation on other than real property is ordinary income.

If the property value is not increasing, as noted above, and if you have a loss, the part of the loss corresponding to times the property was not a rental would be a capital loss.

The gross amount of the sale doesn't appear anywhere on the K-1s. If there is a (capital) gain, and the will doesn't explicitly allocate it to the beneficiaries, then the estate might have to pay tax on that capital gain. An aggressive approach would be to check the (allocate to beneficiaries) box on the 1041 Schedule D, but I'm not sure it's justified. It's a more complex legal question, but if the will specifies the house be sold for the beneficiaries, it would be justified. If the will specifies that the house be sold and the proceeds distributed, it might not be.

In any case, if the estate has negative income (which seems possible), that negative income is allocated to the beneficiaries on line 11 of the Schedule K-1s.

If there were a capital gain, and it could be allocated to the beneficiaries, the overall gain would be reported on Line 4a of the Schedule K-1, and the section 1250 recapture component would be on line 4c.

I may have described how the sale is reported in more detail than you need.

The $25K should have been deducted as expenses of the estate when you made the payments, so that would have been on the 2009 form 1041, even if you don't receive it until now. If you treat it as a loan from you to the estate, the imputed interest on the loan is additional income to you, even if not paid. Sorry about that.

The cost basis of the rental is the FMV at the time of death, plus any post-death improvements. (For some purposes, it might be considered to be the value at the time it was put into service as a rental, plus any later improvements, if less.)

The NOL from 2009 would be reported as negative other income on the estate's 1041 line 8.

Remember that there has to be a statement attached to the 2009 form 1041 to waive carryback. The statement must specify that "you" (the estate) are choosing to waive the carryback period under section 172(b)(3) of the Internal Revenue Code. If on an amended return filed within 6 months of the due date, the statement must also have "Filed pursuant to section(NNN) NNN-NNNN2" at the top of the statement.

See above on how net losses are reported on line 11 of the K-1s for the final return.

I'd have to see more detail as to why the estate owes taxes on the preliminary 2010 form 1041. Remember to include the income distribution deduction (1041 Schedule B). If there is tax due on the 2009 form 1041, it's unlikely you have an NOL carryover. I need more details to answer that last question.

Edited by Arthur Rubin on 6/1/2010 at 3:56 PM EST
Customer: replied 4 years ago.

-You said "The $25K should have been deducted as expenses of the estate when you made the payments, so that would have been on the 2009 form 1041, even if you don't receive it until now. If you treat it as a loan from you to the estate, the imputed interest on the loan is additional income to you, even if not paid. Sorry about that"

 

When I did the 2009 initial 1041, I contact the IRS and tax lawyer (not a cust serv rep) and he said the $25K would not have to be reported at all on the form in either 2009 or the final in 2010. That the estate should just issue me a check before distribution to all beneficiaries are made on the K-1. Then I can use the 25K in improvements to reduce my portion of the cap gains in my 1040.

 

I have done some research. It appears that perhaps I can use the 25K to reduce the estate tax before distribution so all my sisters benefit rather than just taking it afterwards on my 1040. Then, if I understand the IRS, I will still get reimbursed that 25K from the state.

 

-The preliminary 1041 showed tax due because I failed to do the income distribution in sch B so i was being taxed on the Cap gains at th estate level. Once I filled in sch B line 18 (I think), the tax became zero.

 

-

Expert:  Arthur Rubin replied 4 years ago.
My analysis above on the $25K was faulty. Thank you for giving me an opportunity to clarify.

The last time I saw the amount you advanced for expenses of the estate, it was $15K. In any case, if it is legitimate expenses of the estate, the fact that you initially paid it and are reimbursed from the estate is irrelevant. The expenses are reportable on the estate's return(s) just as if the estate paid them directly. In general, though "fixing up", as you put it for the $15K, is probably not deductible. Pre-rental repairs might be deductible.

As the amount is less than $100K, the imputed interest calculations are probably not necessary.

As for the estate's capital gains, unless the capital gains from the property are treated as income under local law, or the will specifies that property is to be sold for the beneficiaries, rather than the property sold and the proceeds distributed, the capital gains taxes cannot be allocated to the beneficiaries through the income distribution deduction, as they don't contribute to DNI (Schedule B line 7)

Also, my note above about depreciation of other than real property includes information which cannot be applicable to your return. As the rental was only carried on within calendar year 2009, only real estate depreciation is allowable.

I think I'd need more details on the line items on your preliminary 2010 form 1041 to see whether the estate might owe tax.
Arthur Rubin, Tax Preparer
Category: Tax
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Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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