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Ask Matthew Breecher Your Own Question
Matthew Breecher
Matthew Breecher, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 286
Experience:  Director
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Tenn IRD rental income (non probated in TN) Does this pass

Customer Question

Tenn IRD rental income (non probated in TN) Does this pass through on k1 to beneficiaries? is gain from sale reported on 1041 or does it pass through on K1 to beneficiaries?
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: decedant actively participated in rental activity
JA: Is there anything else important you think the Accountant should know?
Customer: To determine whether any gain or loss must be reported by the estate or by the beneficiaries, consult local law to determine the legal owner.
Submitted: 4 months ago.
Category: Tax
Expert:  Matthew Breecher replied 4 months ago.

Why was there no probate, was the property held as joint tenants? Could you explain more? Some types of IRD (like a 401(k)) might be subject to double taxation and reported on both the estate return (if possible) and the beneficiaries returns as income (estate gets the income and then deduction for taxes it pays, net cash then flows to beneficiary as taxable income, depending). However, other income (IRD) could flow directly to the beneficiary if the asset (rental property) was inherited or other agreements in place. This all gets a little complicated based on timing, types of assets, how assets were titled, etc.

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However, there should have been a step up in basis of the rental property going into the estate; or to the other owner (joint tenant of so titled). Then if sold shortly thereafter, there should not be much of a gain (again depending on how titled and step up basis laws), if any at all, as the step up should have been to FMV (at time of death as reported on the 706); the exception being if substantial time has lapsed between the step up date and the sale.

Customer: replied 4 months ago.
The deceased had relocated to Michigan & probate was filed there, his sister was named PR. The property in Tenn. was solely owned by the deceased (no will) and was in the process of being sold, but there was 6 months of rental income prior to the closing. Monies from the from the sale were divided equally between his sister and brother (the only heirs).
Expert:  Matthew Breecher replied 4 months ago.

First part, because the asset was held solely in his name, rental income after death (date of death as reported on the 706) should just be reported as income to the beneficiaries. Technically, this is not IRD; that term is used for income earned but received after death (deceased sold a a car but didn't receive the check until after death). The rental income earned in your case is after death and therefore income of those whom inherited the property. Second, the new basis should have been reported on the final return (706 Schedule A or F) and that is the inherited basis. I cannot imagine any significant change in value between death and the closing of the sale 6 months later. Accordingly, there should not be any capital gain.

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I hope that answers your question, let me know if you need more information.

Expert:  Matthew Breecher replied 4 months ago.

I hope I answered your question with sufficient detail, accuracy, and completeness based on the facts communicated. I would be happy to expand my answer should you need clarification, before you rate my response. If no additional information is needed, please rate my response, based on thoroughness and accuracy, rather than any good or bad news/content. We (the experts) are only compensated when an answer is accepted and rated with at least 3 stars; but my goal is your complete satisfaction and a 5 star rating. I appreciate your prompt response. Sincerely, ***** ***** Breecher, CPA.