Tax Deductions On My Father's Estate?

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El Greco
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Tax Deductions On My Father's Estate?

Post by El Greco » Tue Oct 18, 2016 10:52 am

Question for you tax experts in regards to an estate. In June 2014 my father passed away leaving me and my sister as co-executors of his estate. The only thing in his estate was his home as his investment and bank accounts were in Trust or Transfer on Death to both me and my sister. The total that he left us, including his home, was about 750K.

The will went into probate and took over a year to clear. After it cleared, we did not transfer the deed to ourselves but left it in the estate and put it up for sale. After several months on the market we finally closed on the sale at the end of July 2016. The house sold for 390K.

At that time, on the advice of our real estate attorney, we obtained an EIN number and opened an Estate account to deposit the proceeds of the home sale and then to distribute the money in several small fixed amounts to Dad’s named charities. Now the remainder of the money (about 340K) is set to be equally split between me and my sister.

In the 2 + years we maintained his empty home we had to pay several expenses: About 20k in property taxes, 5K in homeowners insurance, plus utilities, attorney’s fees, real estate broker fees etc. We also spent about 15K in repairs, painting and property cleanup. Are any of these expenses deductible on our individual tax returns?

I’m asking this as my wife’s father recently passed away and her probate attorney said to keep a careful record of all expenses paid to maintain his condo until it is sold as these are deductible. This was news to me as my probate attorney, and real estate attorney never mentioned this. Can someone here help straighten me out?

NotWhoYouThink
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Re: Tax Deductions On My Father's Estate?

Post by NotWhoYouThink » Tue Oct 18, 2016 12:08 pm

Will there be a tax return filed for the estate, maybe because of rental or other income? If so, some of these costs may be deductible from the estate income. Or maybe they'll be deducted from the size of the estate for state estate tax or for probate fee purposes. She should ask.

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celia
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Re: Tax Deductions On My Father's Estate?

Post by celia » Tue Oct 18, 2016 12:54 pm

How were those expenses paid?

At a minimum, the real estate brokers' fee was taken out before you received your proceeds. Property taxes could have been taken out during escrow or maybe someone kept paying them???

Basically whoever paid them and has not been reimbursed yet should be. That will make the remaining balance to be split that much smaller. So at the split, you receive less.

I think they are deductible to the estate so that the estate would have smaller assets to declare.

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El Greco
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Re: Tax Deductions On My Father's Estate?

Post by El Greco » Tue Oct 18, 2016 1:06 pm

Post by NotWhoYouThink » Tue Oct 18, 2016 1:08 pm

Will there be a tax return filed for the estate, maybe because of rental or other income? If so, some of these costs may be deductible from the estate income. Or maybe they'll be deducted from the size of the estate for state estate tax or for probate fee purposes. She should ask.
Actually, I am more interested in my situation than my wife's as I have incurred far more expenses than she will. To answer your question: The house was empty for over 2 years before sold. There was no rental income from the house and no one lived in it and the size of the estate was far below the state minimum for taxation. There were, however, almost 40K in maintenance expenses incurred over that 2+ year period (property taxes, insurance, utilities and repairs). Is any of this tax and maintenance deductible by the heirs/executors who paid these expenses?

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Re: Tax Deductions On My Father's Estate?

Post by JoinToday » Tue Oct 18, 2016 1:15 pm

I deducted everything associated with the sale of my parents house:

1. Fees associated with selling (realtors, escrow, etc)
2. cost to clean & fix up house (including dumpster)
3. utilities (gas, electricity, trash)
4. Travel expenses required to settle estate: mileage driving to & from parents house, air fare, car rental, hotel, etc

5. Note that there might be capital gains or loss between when your father died to when the house sold, so include this in the taxes of the estate or the beneficiaries, whichever makes the most sense.

6. Anything you donate to charity can be written off as a charitable contribution on the beneficiary's taxes.

I think the deductions (losses) can either be used on the estate taxes or distributed to the beneficiaries
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Re: Tax Deductions On My Father's Estate?

Post by SkierMom » Tue Oct 18, 2016 1:27 pm

So sorry about the loss of your father.

Did you get the value of the house appraised when he passed away in 2014? This is the stepped up value of the house. You can deduct through the EIN expenses on the improvement of the house, realtors fees and preparation getting it to sale for the two years from the difference of the sale price to the stepped up value. If this is a negative number, you can report it as a loss on the estates' tax return or split the loss between your return and your sisters if you both have 50-50 inheritable amounts.

I'm not entirely clear what expenses constitute "improving the home or getting it ready for sale" and thereby are tax deductible versus regular maintenance on the home, which are not tax deductible. I would say it is not an attorney but a sharp CPA (and someone who is an enrolled agent) that can discern and interpret the expenses per IRS tax code, that you need.

DH and I kept any and all remotely-related receipts when my MIL passed on and the family home was sold almost two years later. There was a discrepancy in the interpretation of the estate bookkeeper my BIL insisted on hiring (personal friend of his) for the estate return and our own enrolled-agent CPA which we claimed as a loss expense on our own tax return. Ultimately, the less in tax the estate pays the more net is split between inheritors. Since there was some personal grievances in our situation (which hopefully do not exist with you and your sister) DH and I netted slightly more because we deducted more valid expenses on our personal return that were missed from the estate bookkeeper.

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El Greco
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Re: Tax Deductions On My Father's Estate?

Post by El Greco » Tue Oct 18, 2016 1:30 pm

by JoinToday » Tue Oct 18, 2016 2:15 pm

I deducted everything associated with the sale of my parents house:

1. Fees associated with selling (realtors, escrow, etc)
2. cost to clean & fix up house (including dumpster)
3. utilities (gas, electricity, trash)
4. Travel expenses required to settle estate: mileage driving to & from parents house, air fare, car rental, hotel, etc

5. Note that there might be capital gains or loss between when your father died to when the house sold, so include this in the taxes of the estate or the beneficiaries, whichever makes the most sense.

6. Anything you donate to charity can be written off as a charitable contribution on the beneficiary's taxes.

I think the deductions (losses) can either be used on the estate taxes or distributed to the beneficiaries
Thanks. Exactly how is this done? It's been suggested that the estate file a form 1041 claiming the deductions then issue K-1s to the beneficiaries to deduct off of their personal income taxes. Is this correct?

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Re: Tax Deductions On My Father's Estate?

Post by Gill » Tue Oct 18, 2016 3:02 pm

You have been given some wide-ranging tax advice here, some of which is not entirely accurate. Some of the confusion lies in the treatment given to administration expenses in an estate which differ considerably from the treatment allowed to an individual taxpayer. An estate is allowed to deduct, either on the estate tax return or on the estate's income tax return, administration expenses which include expenses incurred for the management, conservation, or maintenance of property.

The expenses you outline appear to be proper deductions and should be deducted on the estate's 1041 income tax return which will then be passed out to the beneficiaries by way of a Schedule K-1 issued to them.

Gill
Last edited by Gill on Tue Oct 18, 2016 4:39 pm, edited 1 time in total.

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Re: Tax Deductions On My Father's Estate?

Post by Gill » Tue Oct 18, 2016 3:05 pm

JoinToday wrote:Anything you donate to charity can be written off as a charitable contribution on the beneficiary's taxes.
Sorry, that is not correct when the payment to the charity is the result of a charitable devise. In other words, the gift is from the estate, not the beneficiary of the estate.
Gill

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El Greco
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Re: Tax Deductions On My Father's Estate?

Post by El Greco » Tue Oct 18, 2016 4:17 pm

Post by Gill » Tue Oct 18, 2016 4:02 pm

You have been given some wide-ranging tax advice here, some of which is not entirely accurate. Some of the confusion lies in the treatment given to administration expenses in an estate which differ considerably from the treatment allowed to an individual taxpayer. An estate is allowed to deduct, either on the estate tax return or on the estate's income tax return, administration expenses which include expenses incurred for the management, conservation, or maintenance of property.

The expenses you outline appear to be proper deductions and should be deducted on the estates 1041 income tax return which will then be passed out to the beneficiaries by way of a Schedule K-1 issued to them.

Gill
Thank you Gill. I just have one more question so I'm sure I understand. Even thought the estate is small, 390K, and will not owe either federal or state estate taxes, It can still deduct administration expenses and then issue K-1s to the beneficiaries so they can deduct the "losses" from their personal income taxes? I plan to discuss this all with my accountant but want to make sure I understand and have the facts straight first.

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Re: Tax Deductions On My Father's Estate?

Post by Gill » Tue Oct 18, 2016 4:34 pm

That is correct. The size of the estate is irrelevant. The income or loss will be distributed to the beneficiaries.
Gill

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Re: Tax Deductions On My Father's Estate?

Post by NotWhoYouThink » Tue Oct 18, 2016 4:50 pm

Doesn't a loss from a K-1 get reported under miscellaneous deductions, which only get matter to the extent they exceed 2% of AGI?

From IRS instructions:
Box 11, Code A—Excess Deductions on Termination

If this is the final return of the estate or trust, and there are excess deductions on termination, you may deduct the beneficiary’s share of the excess deductions on line 23 of Schedule A (Form 1040) as a miscellaneous itemized deduction subject to the 2% floor.

Excess deductions on termination occur only during the last tax year of the trust or decedent’s estate when the total deductions (excluding the charitable deduction and exemption) are greater than the gross income during that tax year. Only the beneficiary of an estate or trust that succeeds to its property is allowed to deduct that entity’s excess deductions on termination. A beneficiary who does not have enough income in that year to absorb the entire deduction may not carry the balance over to any succeeding year.

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Re: Tax Deductions On My Father's Estate?

Post by Gill » Tue Oct 18, 2016 5:34 pm

No, the capital loss is not an excess deduction.
Gill

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Re: Tax Deductions On My Father's Estate?

Post by bnes » Tue Oct 18, 2016 7:25 pm

The right way to handle this was for the estate to directly pay those expenses.
The correction is to have the estate reimburse the individuals who made the expenses.

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Re: Tax Deductions On My Father's Estate?

Post by El Greco » Tue Oct 18, 2016 10:33 pm

by bnes » Tue Oct 18, 2016 8:25 pm

The right way to handle this was for the estate to directly pay those expenses.
The correction is to have the estate reimburse the individuals who made the expenses.
Yes. In a perfect world that would be true. However, I was not even able to open an estate account for over a year as the will took that long to be probated. Expenses were accruing and someone had to pay them. Also there was no cash in the estate, just property. The only way there could be cash in the estate is if I loaned it to the estate. Will there be a problem if the estate reimburses me?

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Re: Tax Deductions On My Father's Estate?

Post by Gill » Wed Oct 19, 2016 5:15 am

Just to make it clear, have the estate reimburse each of you for the amounts advanced out of the proceeds of the sale. I was aware you didn't have the cash in the estate and what you did was correct and the only alternative at the time.
Gill

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Re: Tax Deductions On My Father's Estate?

Post by Earl Lemongrab » Wed Oct 19, 2016 10:46 am

El Greco wrote:
by bnes » Tue Oct 18, 2016 8:25 pm

The right way to handle this was for the estate to directly pay those expenses.
The correction is to have the estate reimburse the individuals who made the expenses.
Yes. In a perfect world that would be true. However, I was not even able to open an estate account for over a year as the will took that long to be probated. Expenses were accruing and someone had to pay them. Also there was no cash in the estate, just property. The only way there could be cash in the estate is if I loaned it to the estate. Will there be a problem if the estate reimburses me?
When I was executor, it didn't work that way. The will was submitted to the probate court, and they appointed me as the personal representative. With the letters of appointment, I was able to open an estate account and contact the various custodians to begin liquidating accounts. The checks would be made out to the estate and I could deposit them in the estate account. Expenses could be paid from that. As the close probate, a payment schedule to the heirs was issued. I wrote checks from the estate account and then closed it.

My attorney explained all this and guided the process.

Earl
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Re: Tax Deductions On My Father's Estate?

Post by bnes » Wed Oct 19, 2016 12:48 pm

El Greco wrote:Will there be a problem if the estate reimburses me?
For properly documented expenses, there is no problem with the estate reimbursing. It just like a plumber who did work but did not get around to billing you for some months: the bill is due when presented. The estate files form 1041, you file your regular taxes. The amounts reimbursed are handed at the estate level, and are not taxable events to your personal taxes.

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Re: Tax Deductions On My Father's Estate?

Post by Sagenick48 » Thu Oct 20, 2016 7:23 am

Just as a word of caution, and by the way Gill gave you some excellent advice here, every state and every estate is different.

So in some states the process can be longer, more complicated and more expensive, and in others simpler and cheaper.

So estates can be complicated, while taking a year to get appointed as a PR seems long, if there are questions about the will, it's execution, or the maker's competence, appointment can be delayed.

In the meantime, the funeral bills, utility bills etc need to be paid. Every state whose laws I ever looked at, and the Uniform Probate Code, have/had provisions that allowed persons who advanced funds for the protection of the estate, or to pay priority expenses, to be reimbursed.
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Re: Tax Deductions On My Father's Estate?

Post by bsteiner » Thu Oct 20, 2016 8:05 am

The states I'm familiar with also have a provision whereby, if there's a delay in probating the Will (for example, if there's a Will contest), the court can appoint a preliminary executor (the title varies from state to state), usually the person named in the Will being offered for probate. The preliminary executor has all of the powers of an executor except he/she can't distribute the assets to the beneficiaries (and sometimes needs court approval to sell real estate). That way, assets can be managed and debts and expenses can be paid while the Will contest is pending.

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Re: Tax Deductions On My Father's Estate?

Post by JoinToday » Fri Oct 21, 2016 1:49 am

Gill wrote:
JoinToday wrote:Anything you donate to charity can be written off as a charitable contribution on the beneficiary's taxes.
Sorry, that is not correct when the payment to the charity is the result of a charitable devise. In other words, the gift is from the estate, not the beneficiary of the estate.
Gill
I agree with Gill's statement if the charity is the result of a charitable device. But if the will states that personal goods (furniture, kitchen stuff, etc) is split between the beneficiaries (with no charitable device specified), and the beneficiaries donate the goods ("you" in my response), then my statement stands correct.
Gill wrote:.......
The expenses you outline appear to be proper deductions and should be deducted on the estate's 1041 income tax return which will then be passed out to the beneficiaries by way of a Schedule K-1 issued to them.

Gill
This is what we did for my mom's trust. Losses & expenses associated with the sale of the house were distributed to the beneficiaries via 1041. In my mom's trust, the gains were $0, and all the losses were distributed via 1041

I believe tax rates should be considered here [Gill, Bruce, or other experts may want to confirm this]. If the tax rates of the beneficiaries is higher than the estate/trust, it is better to have the estate/trust take gains, and distribute the losses. Depending on the tax rates of the beneficiaries, it may be of benefit for the estate/trust to claim some of the gains and/or losses, and distribute the rest.
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Re: Tax Deductions On My Father's Estate?

Post by Gill » Fri Oct 21, 2016 5:19 am

JoinToday wrote:I believe tax rates should be considered here [Gill, Bruce, or other experts may want to confirm this]. If the tax rates of the beneficiaries is higher than the estate/trust, it is better to have the estate/trust take gains, and distribute the losses. Depending on the tax rates of the beneficiaries, it may be of benefit for the estate/trust to claim some of the gains and/or losses, and distribute the rest.
You have no choice. If the estate is distributed to the beneficiaries that automatically carries the loss and excess deductions out to the beneficiaries.
Gill

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Re: Tax Deductions On My Father's Estate?

Post by El Greco » Fri Oct 21, 2016 10:55 am

OP here. I want to thank all of you so much for your insights and advice. In fact, I'm going to print out this thread to show to my accountant. Until recently, I had no idea I could recoup some of these expenses via tax deduction. The Bogleheads are a fountain of financial knowledge! :happy

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