Question about Estate House Sale?

Question

Hi,
My mom passed away last August and we just recently sold her home. We have paid all claims etc, and now are dividing the profits as she noted in her will. I just do not know how I find out what taxes I will owe. All amounts are below 60K. I live in DC, and the house sale was in MA. Thank you!

Answer 1

If you didn't use her home as your personal residence, you are liable for any gains or losses in the house from when she died to when it was sold. If it was sold in a relatively quick timeframe, chances are the house was NOT sold for more than it was worth when she died. You get to subtract all expenses to sell the home from any profit. For that reason, most inherited homes are actually sold at a capital loss which is written off against your taxes.

An example will best explain all this mess:

10/1/2004: Person dies and leaves house to you. The fair market value (FMV) of the house on 10/1/04 is $200,000. Notice I don't mention what they paid for the house...it is irrelevant.

10/2/2004 thru 1/22/2005: You spend $500 going to the house (airfare, gas, etc.) to fix it up to get it ready to sale. You buy $100 in paint. You pay $400 to a landscaper. In all, you incurred $1000 in expenses sprucing up the house for sale.

1/23/2005: The house is sold for $205,000. The realtor fees, inspection fees, and all other fees on the HUD form came to $8,000.

Your 2005 capital gain on the sale of the house is $205,000 - $200,000 - $1,000 - $8,000 or a grand total gain of minus $4,000. Yes, even though you got money for the home, you actually have a capital loss of $4,000 which you can write off on your 2005 Schedule D. This will save you $1000 if you are in the 25% tax bracket.

Most people who inherit houses, which weren't used by them as a personal residence, end up with a tax loss. If you are unsure how to handle this on your tax return, please see a professional. Even if they charge you $150 to do your tax return, it is possible to save more than that if it is done properly. When more than one person inherits the same property, divide everything appropriately among the inheritors.

Finally, even though there are estate taxes, most people's estates are less than the $2 million threshold for having to file an estate tax return (Form 709). Estate taxes are the responsibility of the executor of the estate. I'm thinking your mother's estate is below the cut-off, and therefore, will not be taxed. Form 1041 (mentioned in a different answer) is filed when the estate, after the death, earns money. Example: your mother had money in a savings account and it stayed in the account earning interest after she died. The amount of income has to be somewhat significant to trigger a 1041...a few bucks isn't going to do it. Finally, there are no federal inheritance taxes whatsoever. Some states have inheritance taxes, so each person who inherited money should check with their respective states to see if they owe. Usually, the percentage is reasonable.

One more thing, the FMV of the home is either the day of death, or 6 months afterwards. The later valuation is called the Alternative Date Valuation. It is up to the executor to determine which method will be used to determine FMV for the house. Normally, the method which produces a higher value (therefore a lower gain) is used.

Hope this helps :)

Answer 2

Sorry about your mom. Your share of
income distributed from an estate gets reported on schedule E of federal form 1040 in the year of distrib. That income gets added to any other personal income you may have to determine taxability.
Most state returns have a line to show the income from 1040 Schedule E. If you live in DC then you will file your personal return with DC.
The estate may have to file form 1041 and the equivalent for the state of MA if that where you mom last lived to show the distribution of proceeds. If the proceeds from the estate are completely distributed then most likely the estate will not have any net taxable income and will not owe tax to the state where house was sold.

Answer 3

The taxes must be paid by the 'estate' before dividing up the profits. Then each individual would only pay taxes on their part of the capital gain attributable to an increase in value since the time of death. If the death was August 2006, There would be no gain to the individuals, only the estate.

Answer 4

Call the IRS in your state, they will assist you with this question and any others that you may have, since they will be the ones you will be giving the money too. You can be certain the answer will be correct, and it doesn`t cost you anything, and the phone call is a toll free number.