Sale of inherited house by estate: tax question

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ccieemeritus
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Sale of inherited house by estate: tax question

Post by ccieemeritus » Tue May 29, 2018 4:18 pm

My Mom passed away on 11/1/17. Estate went into probate. I'm the executor.

We estimated her house had a value of $315,000 on the probate inventory without doing a formal appraisal (we were nowhere close to any form of inheritance tax or a change in the probate listing fees--so the precise value didn't make a difference).

House value Zestimate history (from Zillow.com) on 11/1/17 is $387k.

On 6/1/18 (delayed due to some repair work), we are selling the house for $376,500.

Total cost of sale, including paint, carpet, repair work, realtor commissions, fees is $40,488. That gives a $336,012 net.

If we stick to the estimate of $315,000 from the probate inventory, that would result in a capital gain of $21,012, forcing me to fill out estate taxes and pay some tax on the "gain".

But if we believe the fair market value on 11/1/17 was at least $336,000, there is no gain. No taxes. No estate tax form. That's very defensible given the 11/1/17 Zestimate of $387k, other than the rough estimate we put on the probate inventory. I'm not looking for a capital loss here. Just no taxes and no tax forms given that we sold the house as fast as we could after death given some repair work.

I'd appreciate a 2nd opinion.

123
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Re: Sale of inherited house by estate: tax question

Post by 123 » Tue May 29, 2018 4:34 pm

I'm with you. If you are anxious to demonstrate a gain in the value of the house between date of death and date of sale you should hire an appraiser since that is probably the only way to get it actually resolved. You may want to ask the attorney or escrow company finalizing the sale if they will issue a 1099 for sale proceed since that could cause a hiccup necessitating a tax filing (even for zero gain). When I assisted an elderly relative in the sale of a house one of the settlement documents signed by the seller covered the issue of personal residence and capital gain exclusions, the end result was no 1099 was issued by the escrow company.

For estate there is an alternative evaluation of all assets as of six months after the date of death. So likely no issue.
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Gill
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Re: Sale of inherited house by estate: tax question

Post by Gill » Tue May 29, 2018 5:55 pm

You are close enough to the date of death to claim $376,500 as the date of death value and therefore the basis. The best indication of FMV is the sales price. If you don’t want to use this basis you could certainly use the $336,000 figure.
Gill
Last edited by Gill on Tue May 29, 2018 5:59 pm, edited 1 time in total.

Gill
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Re: Sale of inherited house by estate: tax question

Post by Gill » Tue May 29, 2018 5:57 pm

123 wrote:
Tue May 29, 2018 4:34 pm

For estate there is an alternative evaluation of all assets as of six months after the date of death. So likely no issue.
Alternate valuation has to application in this situation.
Gill

ETadvisor
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Re: Sale of inherited house by estate: tax question

Post by ETadvisor » Tue May 29, 2018 8:09 pm

ccieemeritus wrote:
Tue May 29, 2018 4:18 pm
My Mom passed away on 11/1/17. Estate went into probate. I'm the executor.

We estimated her house had a value of $315,000 on the probate inventory without doing a formal appraisal (we were nowhere close to any form of inheritance tax or a change in the probate listing fees--so the precise value didn't make a difference).

House value Zestimate history (from Zillow.com) on 11/1/17 is $387k.

On 6/1/18 (delayed due to some repair work), we are selling the house for $376,500.

Total cost of sale, including paint, carpet, repair work, realtor commissions, fees is $40,488. That gives a $336,012 net.

If we stick to the estimate of $315,000 from the probate inventory, that would result in a capital gain of $21,012, forcing me to fill out estate taxes and pay some tax on the "gain".

But if we believe the fair market value on 11/1/17 was at least $336,000, there is no gain. No taxes. No estate tax form. That's very defensible given the 11/1/17 Zestimate of $387k, other than the rough estimate we put on the probate inventory. I'm not looking for a capital loss here. Just no taxes and no tax forms given that we sold the house as fast as we could after death given some repair work.

I'd appreciate a 2nd opinion.
The sales price is the FMV especially since it was sold within 1 year of DOD. I could argue even if sold within 15 months of DOD that you could use the sales price. I have come across estates with formal appraisals lower than sales price and the sales price was controlling. The probate inventory can be amended to reflect the sales value. The DOO value (sales price) is the adjusted basis for income tax purposes.

RickBoglehead
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Re: Sale of inherited house by estate: tax question

Post by RickBoglehead » Wed May 30, 2018 12:34 pm

The probate valuation is used by the court to compute fees owed to them. Is the court reviewing the sale? If not, they have no knowledge of what you're doing with taxes, or not doing with taxes.

If you examine the fees, you'd probably discover that the increase in value is worth very little to the court. In my area, it would be 0.00125 or $26.27...

I would do exactly what you're proposing doing, assume no gain on sale and pay no taxes.

trueblueky
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Re: Sale of inherited house by estate: tax question

Post by trueblueky » Wed May 30, 2018 12:42 pm

ccieemeritus wrote:
Tue May 29, 2018 4:18 pm
My Mom passed away on 11/1/17. Estate went into probate. I'm the executor.

We estimated her house had a value of $315,000 on the probate inventory without doing a formal appraisal (we were nowhere close to any form of inheritance tax or a change in the probate listing fees--so the precise value didn't make a difference).

House value Zestimate history (from Zillow.com) on 11/1/17 is $387k.

On 6/1/18 (delayed due to some repair work), we are selling the house for $376,500.

Total cost of sale, including paint, carpet, repair work, realtor commissions, fees is $40,488. That gives a $336,012 net.

If we stick to the estimate of $315,000 from the probate inventory, that would result in a capital gain of $21,012, forcing me to fill out estate taxes and pay some tax on the "gain".

But if we believe the fair market value on 11/1/17 was at least $336,000, there is no gain. No taxes. No estate tax form. That's very defensible given the 11/1/17 Zestimate of $387k, other than the rough estimate we put on the probate inventory. I'm not looking for a capital loss here. Just no taxes and no tax forms given that we sold the house as fast as we could after death given some repair work.

I'd appreciate a 2nd opinion.
Sounds like you have a $40,488 long-term capital loss.

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Watty
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Re: Sale of inherited house by estate: tax question

Post by Watty » Wed May 30, 2018 12:52 pm

It would probably make sense to have an accountant handle this paperwork since there could be deductions that you might miss.

When we were settling my Mom's estate and selling here house there were actually enough deductions that there was a loss on the sale. The house had a similar value and took a similar time to sell.

I don't remember the details but the accountant that was preparing the final tax return and the estate paperwork gave each of the siblings the detailed paperwork and instructions on how to enter the loss(expense?) on their tax returns.

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VA_Gent
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Re: Sale of inherited house by estate: tax question

Post by VA_Gent » Wed May 30, 2018 1:02 pm

trueblueky wrote:
Wed May 30, 2018 12:42 pm
ccieemeritus wrote:
Tue May 29, 2018 4:18 pm
My Mom passed away on 11/1/17. Estate went into probate. I'm the executor.

We estimated her house had a value of $315,000 on the probate inventory without doing a formal appraisal (we were nowhere close to any form of inheritance tax or a change in the probate listing fees--so the precise value didn't make a difference).

House value Zestimate history (from Zillow.com) on 11/1/17 is $387k.

On 6/1/18 (delayed due to some repair work), we are selling the house for $376,500.

Total cost of sale, including paint, carpet, repair work, realtor commissions, fees is $40,488. That gives a $336,012 net.

If we stick to the estimate of $315,000 from the probate inventory, that would result in a capital gain of $21,012, forcing me to fill out estate taxes and pay some tax on the "gain".

But if we believe the fair market value on 11/1/17 was at least $336,000, there is no gain. No taxes. No estate tax form. That's very defensible given the 11/1/17 Zestimate of $387k, other than the rough estimate we put on the probate inventory. I'm not looking for a capital loss here. Just no taxes and no tax forms given that we sold the house as fast as we could after death given some repair work.

I'd appreciate a 2nd opinion.
Sounds like you have a $40,488 long-term capital loss.
Loss not allowable only gain.
"In investing, what is comfortable is rarely profitable." - Robert Arnott

Alan S.
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Re: Sale of inherited house by estate: tax question

Post by Alan S. » Wed May 30, 2018 1:35 pm

The loss is allowed as long as nothing is done to convert the house into personal use (eg a beneficiary moves into the house, it is held for rent etc). If none of these things are done, the house is considered investment property of the estate. When the estate closes, the applicable LT loss can be passed through in proportion to the estate beneficiaries and claimed on their personal returns. This always seems to generate a debate, but the IRS does not have a problem if done right and cost basis is not overstated or amount realized understated.

Commissions alone will usually be enough to generate a decent loss upon sale if the sale closes within a reasonable time after the DOD.

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VA_Gent
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Re: Sale of inherited house by estate: tax question

Post by VA_Gent » Wed May 30, 2018 1:51 pm

Alan S. wrote:
Wed May 30, 2018 1:35 pm
The loss is allowed as long as nothing is done to convert the house into personal use (eg a beneficiary moves into the house, it is held for rent etc). If none of these things are done, the house is considered investment property of the estate. When the estate closes, the applicable LT loss can be passed through in proportion to the estate beneficiaries and claimed on their personal returns. This always seems to generate a debate, but the IRS does not have a problem if done right and cost basis is not overstated or amount realized understated.

Commissions alone will usually be enough to generate a decent loss upon sale if the sale closes within a reasonable time after the DOD.
Interesting. I assumed it immediately became personal use. What happens if there is no probate and only one heir?
"In investing, what is comfortable is rarely profitable." - Robert Arnott

Gill
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Re: Sale of inherited house by estate: tax question

Post by Gill » Wed May 30, 2018 2:18 pm

VA_Gent wrote:
Wed May 30, 2018 1:51 pm
Alan S. wrote:
Wed May 30, 2018 1:35 pm
The loss is allowed as long as nothing is done to convert the house into personal use (eg a beneficiary moves into the house, it is held for rent etc). If none of these things are done, the house is considered investment property of the estate. When the estate closes, the applicable LT loss can be passed through in proportion to the estate beneficiaries and claimed on their personal returns. This always seems to generate a debate, but the IRS does not have a problem if done right and cost basis is not overstated or amount realized understated.

Commissions alone will usually be enough to generate a decent loss upon sale if the sale closes within a reasonable time after the DOD.
Interesting. I assumed it immediately became personal use. What happens if there is no probate and only one heir?
Correct. There is an allowable loss. Probate has no relevance nor does number of estate beneficiaries.
Gill

ccieemeritus
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Re: Sale of inherited house by estate: tax question

Post by ccieemeritus » Sun Jun 03, 2018 11:15 am

Thank you all for your comments. It seems clear that I don't need to file an estate tax return for the gains. I'd get nervous about trying to claim a $30k loss and passing it on to the heirs (only $18k of that would go to people with income where it would be beneficial). So I'm not likely to do that. I've brought the possibility to the heirs attention in case they insist. I may also do some additional research.

cherijoh
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Re: Sale of inherited house by estate: tax question

Post by cherijoh » Sun Jun 03, 2018 11:35 am

trueblueky wrote:
Wed May 30, 2018 12:42 pm
ccieemeritus wrote:
Tue May 29, 2018 4:18 pm
My Mom passed away on 11/1/17. Estate went into probate. I'm the executor.

We estimated her house had a value of $315,000 on the probate inventory without doing a formal appraisal (we were nowhere close to any form of inheritance tax or a change in the probate listing fees--so the precise value didn't make a difference).

House value Zestimate history (from Zillow.com) on 11/1/17 is $387k.

On 6/1/18 (delayed due to some repair work), we are selling the house for $376,500.

Total cost of sale, including paint, carpet, repair work, realtor commissions, fees is $40,488. That gives a $336,012 net.

If we stick to the estimate of $315,000 from the probate inventory, that would result in a capital gain of $21,012, forcing me to fill out estate taxes and pay some tax on the "gain".

But if we believe the fair market value on 11/1/17 was at least $336,000, there is no gain. No taxes. No estate tax form. That's very defensible given the 11/1/17 Zestimate of $387k, other than the rough estimate we put on the probate inventory. I'm not looking for a capital loss here. Just no taxes and no tax forms given that we sold the house as fast as we could after death given some repair work.

I'd appreciate a 2nd opinion.
Sounds like you have a $40,488 long-term capital loss.
Zillow just isn't that accurate. Without a formal appraisal I don't think it is a good idea to try and claim a loss.

bsteiner
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Re: Sale of inherited house by estate: tax question

Post by bsteiner » Sun Jun 03, 2018 12:39 pm

Gill wrote:
Tue May 29, 2018 5:55 pm
You are close enough to the date of death to claim $376,500 as the date of death value and therefore the basis. The best indication of FMV is the sales price. If you don’t want to use this basis you could certainly use the $336,000 figure.
If nothing significant happens in the interim, we often use the sale price if the sale took place soon after death. We've never had the IRS question that.

The issue more often arises on audit when there's a sale soon after death and we've claimed a value different from the sale price, and we have to show why the value should be something other than the sale price. Sometimes something significant happens between date of death (or the alternate valuation date) and the date of sale. A building in lower Manhattan would probably have been worth less on September 12, 2001, than on September 10, 2001. We've had cases where the owner of an adjoining apartment or an adjacent property paid more than fair market value to buy a particular apartment or property. A buyer might overpay for no known reason. There could be a quick change in the market. For example, in some places, residential real estate dropped in 1990 due to the first Iraq war.

Gill
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Re: Sale of inherited house by estate: tax question

Post by Gill » Sun Jun 03, 2018 2:34 pm

ccieemeritus wrote:
Sun Jun 03, 2018 11:15 am
Thank you all for your comments. It seems clear that I don't need to file an estate tax return for the gains. I'd get nervous about trying to claim a $30k loss and passing it on to the heirs (only $18k of that would go to people with income where it would be beneficial). So I'm not likely to do that. I've brought the possibility to the heirs attention in case they insist. I may also do some additional research.
You won't receive any better advice than that of bsteiner above. Use the sales price as your basis and don't give it another thought.
Gill

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