Help with Form 1041 Reporting of Real Property Sale by Estate

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HomeStretch
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Help with Form 1041 Reporting of Real Property Sale by Estate

Post by HomeStretch »

My parent’s estate was settled and closed in 2023. The estate consisted solely of a condo (parent’s primary residence) that was sold in 2023 ~4 months after the date of death (DOD) and interest/ordinary dividends earned on the sale proceeds. The final balance in the estate account was split equally in thirds per the terms of the Will. All good.

I received a draft 2023 Form 1041 with a request to review from the parent’s estate executor (who is not an estate attorney/tax accountant and I also am not).
On Form 1041, I expected to see:
1. $3.7k in interest/dividends per the estate’s 2023 Form 1099s reported on Form 1041 lines 1 and 2. It is, all good.
2. A loss on the condo sale. There is nothing reported on Form 1041. I expected to see a $19k loss.

The condo’s gross selling price was $220k (reported on 2023 Form 1099-S Box 2). My assumption is that we can claim that the condo’s FMV at DOD equals the gross sale proceeds from the sale 4 months after DOD. There was no appraisal done. There were $19k in selling/other costs for broker fees, attorney fee, etc. which is the loss I expected.

The draft of the final/only K-1 distributes 1/2 the income of $3.7k in boxes 1 and 2a to me. The K-1 does not include a final distribution to me of 1/2 1/3 the loss on the sale of $19k.

Questions for anyone with experience with estate Form 1041/K-1s with final distribution:

1. Should a loss of $19k also be reported on Form 1041 and distributed on Form K-1s to each of the two three beneficiaries?

2. Do we need an appraisal? I have read in past forum threads it is generally not required if the property is sold within 1 year of DOD. But I don’t see this language in the IRS Form 1041 instructions.

3. If the loss can be claimed is this correct:
A. Form 1041 line 4 ‘capital gains’ and schedule D
B. K-1 Box 11 ‘final deductions’


Thank you for any help with this.
Last edited by HomeStretch on Wed Apr 03, 2024 5:18 pm, edited 4 times in total.
MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by MarkNYC »

Assuming no one lived in the house after the date of the owner's death, I agree there should be a capital loss allowed as a pass-through to the beneficiaries. Without any unusual local circumstances, a sale that close to date of death should not require an appraisal. Even if the attorney/accountant incorrectly assumed no deductible loss on the sale, what is their explanation for omitting the sale from the tax return in the presence of Form 1099-S?

The capital loss may be used against the ordinary income such that the loss passing to the beneficiaries is less than $19K.

And why no deduction on the tax return for attorney or accountant fees?
Topic Author
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by HomeStretch »

MarkNYC wrote: Mon Mar 04, 2024 2:18 pm Assuming no one lived in the house after the date of the owner's death, I agree there should be a capital loss allowed as a pass-through to the beneficiaries. Without any unusual local circumstances, a sale that close to date of death should not require an appraisal. Even if the attorney/accountant incorrectly assumed no deductible loss on the sale, what is their explanation for omitting the sale from the tax return in the presence of Form 1099-S?

The capital loss may be used against the ordinary income such that the loss passing to the beneficiaries is less than $19K.

And why no deduction on the tax return for attorney or accountant fees?
Thank you, MarkNYC.

The estate was opened in Nov. Oct. 2022. The estate paid an attorney fee of $2k in 20232 for the probate court filings. A 2022 Form 1041 was not filed because 2022 income for the estate was ~$50. It sounds like those attorney fees are allowed be added into the calculation of the loss distributed to the beneficiaries in 2023 as part of the K-1 final distribution. Thanks for this catch.
Last edited by HomeStretch on Tue Apr 02, 2024 4:20 pm, edited 2 times in total.
MarkNYC
Posts: 3021
Joined: Mon May 05, 2008 7:58 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by MarkNYC »

HomeStretch wrote: Mon Mar 04, 2024 2:36 pm
MarkNYC wrote: Mon Mar 04, 2024 2:18 pm Assuming no one lived in the house after the date of the owner's death, I agree there should be a capital loss allowed as a pass-through to the beneficiaries. Without any unusual local circumstances, a sale that close to date of death should not require an appraisal. Even if the attorney/accountant incorrectly assumed no deductible loss on the sale, what is their explanation for omitting the sale from the tax return in the presence of Form 1099-S?

The capital loss may be used against the ordinary income such that the loss passing to the beneficiaries is less than $19K.

And why no deduction on the tax return for attorney or accountant fees?
Thank you, MarkNYC.

The estate was opened in Nov. 2022. The estate paid an attorney fee of $2k in 2022 for the probate court filings. A 2022 Form 1041 was not filed because 2022 income for the estate was ~$50. It sounds like those attorney fees are allowed be added into the calculation of the loss distributed to the beneficiaries in 2023 as part of the K-1 final distribution. Thanks for this catch.
Why not elect a fiscal year for the estate 1041, from Nov 2022 through Oct 31, 2023, thereby allowing the inclusion of the $2K legal fees paid in late 2022 on the 1041 FYE Oct 31, 2023?

(Did the $2K include the cost of preparing the 1041?)
Topic Author
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by HomeStretch »

MarkNYC wrote: Mon Mar 04, 2024 2:43 pm
HomeStretch wrote: Mon Mar 04, 2024 2:36 pm
MarkNYC wrote: Mon Mar 04, 2024 2:18 pm Assuming no one lived in the house after the date of the owner's death, I agree there should be a capital loss allowed as a pass-through to the beneficiaries. Without any unusual local circumstances, a sale that close to date of death should not require an appraisal. Even if the attorney/accountant incorrectly assumed no deductible loss on the sale, what is their explanation for omitting the sale from the tax return in the presence of Form 1099-S?

The capital loss may be used against the ordinary income such that the loss passing to the beneficiaries is less than $19K.

And why no deduction on the tax return for attorney or accountant fees?
Thank you, MarkNYC.

The estate was opened in Nov. 2022. The estate paid an attorney fee of $2k in 2022 for the probate court filings. A 2022 Form 1041 was not filed because 2022 income for the estate was ~$50. It sounds like those attorney fees are allowed be added into the calculation of the loss distributed to the beneficiaries in 2023 as part of the K-1 final distribution. Thanks for this catch.
Why not elect a fiscal year for the estate 1041, from Nov 2022 through Oct 31, 2023, thereby allowing the inclusion of the $2K legal fees paid in late 2022 on the 1041 FYE Oct 31, 2023?

(Did the $2K include the cost of preparing the 1041?)
I don’t know as I did not see the attorney’s engagement letter.

The estate fiscal year would be 10/31/22 (day after death) - 9/30/23 (details, below). But the estate account had a 9/30/23 balance of $35 distributed in Oct. 2023 (account closed in Oct. 2023). Can the estate still file one final fiscal year Form 1041 for 10/31/22 - 9/30/23? If not, what might be the best course of action to maximize the K-1 loss distributed taking into account any penalties?

Details:
My terminology in the prior post was wrong. The executor was appointed in Nov. 2022 but the estate’s non-calendar fiscal tax year would start 10/31/22 (day after decedent’s death).

A fiscal-year-ending-9/30/23 Form 1041’s filing deadline would have been 1/15/24 and past due. I will verify that an extension (Form 7004) was not filed (but pretty sure it was not). The late penalty is 5% of tax due for each month filed late but if the return reports a loss it doesn’t sound like there is a penalty to pay.
MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by MarkNYC »

Having $35 remaining in the estate account after 9/30/23 does not prevent the estate from filing a final income tax return fye 9/30/23. Using a 9/30/23 year-end might result in the estate income tax return being filed late, but as you stated, with no tax on the estate income tax return there should be no late penalties.
Topic Author
HomeStretch
Posts: 11621
Joined: Thu Dec 27, 2018 2:06 pm

Re: Help with Form 1041 Reporting of Real Property Sale by Estate

Post by HomeStretch »

MarkNYC wrote: Mon Mar 04, 2024 6:29 pm Having $35 remaining in the estate account after 9/30/23 does not prevent the estate from filing a final income tax return fye 9/30/23. Using a 9/30/23 year-end might result in the estate income tax return being filed late, but as you stated, with no tax on the estate income tax return there should be no late penalties.
Thank you for your feedback. I really appreciate it.
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