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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 7118
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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My wife and I acquired a second home by way of a beneficiary

Customer Question

My wife and I acquired a second home by way of a beneficiary of deed when her sister died in November of 2013. This home was located in AZ. We live in Illinois. The assessed value was $307,000 at time of death. We sold the property on June 6, 2014 for $285,729. Proceeds from this real estate transaction were reported on a form 1099-S. I need to know are there any gains or loss that needs to be considered. We want to divide these proceeds and distribute them to other family heirs. Before we disperse these funds I want to be certain if there are Federal /State taxes due.
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

There should be no taxes on the sale as your tax basis in the inherited property would be equal to the fair market value at the date of death, ie. the $307,000. Did you report the sale on your 2014 income tax returns or haven't you filed your 2014 income tax returns?

Expert:  Stephen G. replied 1 year ago.

Also, Arizona does not have an Inheritance Tax, there's no gift tax & the estate tax was been repealed when the Federal government eliminated the credit for state estate taxes on Federal estate tax computations.

Expert:  Stephen G. replied 1 year ago.

Also, Illinois does not have an inheritance tax (which is a tax imposed on the recipients of property from an estate) & Illinois would have no jurisdiction over an estate with property in Arizona if your sister-in-law was a resident of any state other than Illinois at the time of her death, and she didn't have any property in Illinois.

So that pretty much covers the estate & inheritance tax situation & as far as income tax is concerned, there is no capital gain on the sale to be taxed.

Customer: replied 1 year ago.
This information was most helpful. I did file a 2014 return using a CPA in Illinois. This question I felt a need for a second opinion. My reason for using your service. Thanks again...
Expert:  Stephen G. replied 1 year ago.

One other point to consider if you have not yet filed your income tax return for 2014. In the case of a decedent's property that was not subject to an independent appraisal as of the date of death (an assessed value for real estate tax purposes does not constitute an independent appraisal), when such property is sold within one year of the date of death, it is the IRS practice to use the gross sales price as the fair market value as of the date of death.

Expert:  Stephen G. replied 1 year ago.

We routinely would take the position that inherited property that was not used by the recipient as rental property or for some other business purpose, was "property held for investment" by the recipient. Thus when the property was sold, any costs related to the sale would be added to the recipient's tax basis of the property (generally the fair market value ie. the gross selling price as discussed above) and since it was property held for investment, the resulting loss (due to the selling expenses, deed stamps, sales commissions, legal fees, etc.) would be a reported as a long-term capital loss on the recipient's tax return for the year of sale.

This same treatment would apply if the estate sold the property.

However, the IRS has begun to contest that treatment (in essence contesting the inherited property's status as "property held for investment" & has taken the position that the property remains personal use property in the hands of the recipient if that's what the status of the property was in the hands of the decedent.

As personal use property, any loss on the sale would not be deductible.

The IRS has successfully taken this position to court in a recent court case with an estate that treated the property as "property held for investment" as described above. The IRS won this case, putting this treatment in jeopardy.

I only mention this in case your CPA used this treatment on your 2014 tax return. Just so you know the facts behind the treatment. If no loss was claimed, then there's no issue to be concerned about. In any event, the only time this likely could arise as an issue, related to a now filed 2014 tax return, would be in the case of an audit of the return.

Expert:  Stephen G. replied 1 year ago.

If you have any follow-up questions I would be happy to answer them. If not, I would appreciate it if you would take a moment to rate my response as that is the only way I will receive credit for my work.

Thanks for using JustAnswer.com.

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