1041 Estate Income Tax questions

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itsmeagain
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1041 Estate Income Tax questions

Post by itsmeagain »

Here are the key facts, as I understand them, for someone who has asked for my advice.

His Father passed away in late February 2023. No spouse for last few decades. Most assets (IRA and the like) had named beneficiaries and were promptly distributed.

The Father received social security and annuity income, so the 2023 federal and state income taxes have been filed for the year of death. All straightforward.

The Father’s estate had essentially $0 income in 2023. The bank holding estate account pays a trivial interest rate, so the net interest paid was under $10, and no 1099 form was issued. (There were some expenses for lawyer, tax prep, and the like, but those were small and paid from estate account.)

Q1: Must a 1041 form for the Father’s Estate Income Tax be filed for 2023, if there was no income?

The Father’s house was just sold in March 2024, a little more than a year after the death. However, the net proceeds for the house sale were under $250,000, and the capital gain was even less. The house had been owned for many decades, and there was no previous sale of a home by the Father.

Q2: There’s no capital gain tax due on that amount for a one-time long-term home sale, right?

There will be no other estate income in 2024, as the net proceeds of the house sale will be distributed to beneficiaries before any meaningful interest accrues.

Q3: Must a 1041 form be filed for 2024, if there was only the income from the house sale, and the net gain sale (and gain) was under $250,000?

Thank you in advance for any information and advice!
secondcor521
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Re: 1041 Estate Income Tax questions

Post by secondcor521 »

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Last edited by secondcor521 on Tue Apr 02, 2024 10:37 pm, edited 1 time in total.
HomeStretch
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Re: 1041 Estate Income Tax questions

Post by HomeStretch »

The Estate is required to file Form 1041 if income is $600+. The Estate can elect either a calendar or non-calendar year.

The Estate reports any capital gain or loss (and Form 1099-S, if received) on the sale of the house on Form 1041 Schedule D. The cost basis is likely stepped up to fair market value at the date of death. It’s possible to have a loss on the sale of the house due to the selling costs and, in some cases, the maintenance costs paid by the Estate if the house was unoccupied.

A Form 1041 loss can be distributed to the beneficiaries on K-1 in the final Estate year to be claimed on the beneficiaries’ Form 1040s.
MarkNYC
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Re: 1041 Estate Income Tax questions

Post by MarkNYC »

The $250,000 sales threshold for the house sale is not relevant, because the principal residence exclusion is not applicable to the sale of a residence after the homeowner's death.

A 1041 should be filed to report the sale of the house, and the gain, if any, will be taxable.
LK2012
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Re: 1041 Estate Income Tax questions

Post by LK2012 »

itsmeagain wrote: Tue Apr 02, 2024 7:22 pm Here are the key facts, as I understand them, for someone who has asked for my advice.

His Father passed away in late February 2023. No spouse for last few decades. Most assets (IRA and the like) had named beneficiaries and were promptly distributed.

The Father received social security and annuity income, so the 2023 federal and state income taxes have been filed for the year of death. All straightforward.

The Father’s estate had essentially $0 income in 2023. The bank holding estate account pays a trivial interest rate, so the net interest paid was under $10, and no 1099 form was issued. (There were some expenses for lawyer, tax prep, and the like, but those were small and paid from estate account.)

Q1: Must a 1041 form for the Father’s Estate Income Tax be filed for 2023, if there was no income?

The Father’s house was just sold in March 2024, a little more than a year after the death. However, the net proceeds for the house sale were under $250,000, and the capital gain was even less. The house had been owned for many decades, and there was no previous sale of a home by the Father.

Q2: There’s no capital gain tax due on that amount for a one-time long-term home sale, right?

There will be no other estate income in 2024, as the net proceeds of the house sale will be distributed to beneficiaries before any meaningful interest accrues.

Q3: Must a 1041 form be filed for 2024, if there was only the income from the house sale, and the net gain sale (and gain) was under $250,000?

Thank you in advance for any information and advice!
I don't believe there is a $250,000 exemption for gains from the sale of a decedent. There used to be, but it was repealed long ago.

I think you need a Date of Death Fair Market Value for the house, then you can determine the Estate Income for 2024 in the form of capital gains (or loss). Once you also deduct selling costs, there may or may not be a gain.
Topic Author
itsmeagain
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Re: 1041 Estate Income Tax questions

Post by itsmeagain »

Thank you all for these helpful replies. They clarify the issues a lot. I guess the challenge will be to estimate the fair-market value (FMV) of the house as of the Father's death in February 2023.

Any suggestions there? I see there are some websites, like Rocket Homes, that list the month-by-month median sale price for different cities. Assuming the Father's house sold for FMV in March 2024, would it be acceptable and reasonable to estimate the FMV in February 2023 using the corresponding city's appreciation in FMV of median home over that same period? So if the house sold for $198,000 and the median price increase over that time period was 10%, the the FMV at the time of death would be $180,000 (since 180 x 1.1 = 198).
Dmevsjd
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Re: 1041 Estate Income Tax questions

Post by Dmevsjd »

You’re in a bit of a gray zone. Generally I treated any sale of a residence within a year of DOD as the value of the home on DOD resulting in that sale price being the basis for the home. With costs of sale reducing the proceeds it was pretty much always a capital loss on the sale of the home. You’re 13 months after DOD thus, the gray area.

This loss being done in the year of distribution would mean passing the loss out to the benes on a K1 form as a part of the 1041 filed for the estate for use on their 1040 income tax returns. Costs can be more than a little bit so not giving the benes a K1 could be seen as a breach of fiduciary duty should you decide to just sweep everything under the rug and ignore tax filings.

Food for thought.
HomeStretch
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Re: 1041 Estate Income Tax questions

Post by HomeStretch »

itsmeagain wrote: Wed Apr 03, 2024 8:35 am Thank you all for these helpful replies. They clarify the issues a lot. I guess the challenge will be to estimate the fair-market value (FMV) of the house as of the Father's death in February 2023.

Any suggestions there? I see there are some websites, like Rocket Homes, that list the month-by-month median sale price for different cities….
The gold standard for establishing the home’s fair market value is an appraisal.

I have read suggestions for other options (such as a realtor’s letter or websites such as you suggested) but no idea how the IRS views them.
bsteiner
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Location: NYC/NJ/FL

Re: 1041 Estate Income Tax questions

Post by bsteiner »

HomeStretch wrote: Wed Apr 03, 2024 9:17 am
itsmeagain wrote: Wed Apr 03, 2024 8:35 am Thank you all for these helpful replies. They clarify the issues a lot. I guess the challenge will be to estimate the fair-market value (FMV) of the house as of the Father's death in February 2023.

Any suggestions there? I see there are some websites, like Rocket Homes, that list the month-by-month median sale price for different cities….
The gold standard for establishing the home’s fair market value is an appraisal.

I have read suggestions for other options (such as a realtor’s letter or websites such as you suggested) but no idea how the IRS views them.
It's not how "the IRS" views it. It's how the particular IRS person you're dealing with views it. It may depend on the facts of the particular case.

What does the executor's lawyer recommend?
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: 1041 Estate Income Tax questions

Post by HomeStretch »

bsteiner wrote: Wed Apr 03, 2024 10:31 am
HomeStretch wrote: Wed Apr 03, 2024 9:17 am
itsmeagain wrote: Wed Apr 03, 2024 8:35 am Thank you all for these helpful replies. They clarify the issues a lot. I guess the challenge will be to estimate the fair-market value (FMV) of the house as of the Father's death in February 2023.

Any suggestions there? I see there are some websites, like Rocket Homes, that list the month-by-month median sale price for different cities….
The gold standard for establishing the home’s fair market value is an appraisal.

I have read suggestions for other options (such as a realtor’s letter or websites such as you suggested) but no idea how the IRS views them.
It's not how "the IRS" views it. It's how the particular IRS person you're dealing with views it. It may depend on the facts of the particular case. …
Good point as I have encountered differing “views” from various IRS and state revenue dept. agents for corporate income, sales tax and payroll audits.

Just curious, do Estate Form 1041s have a high percentage of review by the IRS?
bsteiner
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Re: 1041 Estate Income Tax questions

Post by bsteiner »

HomeStretch wrote: Wed Apr 03, 2024 12:17 pm ... do Estate Form 1041s have a high percentage of review by the IRS?
They're supposed to look at them when they audit the estate tax return, but that's mainly to make sure that the executor didn't deduct the same administration expenses on both the estate tax return and the fiduciary income tax returns.

Fiduciary income tax returns are filed by fiduciaries, so they're probably going to have fewer errors than returns filed by living taxpayers.
Topic Author
itsmeagain
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Re: 1041 Estate Income Tax questions

Post by itsmeagain »

bsteiner wrote: Wed Apr 03, 2024 1:34 pm
HomeStretch wrote: Wed Apr 03, 2024 12:17 pm ... do Estate Form 1041s have a high percentage of review by the IRS?
They're supposed to look at them when they audit the estate tax return, but that's mainly to make sure that the executor didn't deduct the same administration expenses on both the estate tax return and the fiduciary income tax returns.

Fiduciary income tax returns are filed by fiduciaries, so they're probably going to have fewer errors than returns filed by living taxpayers.
Is filing an estate tax return (actual estate tax, as opposed to estate income tax on form 1041) required when the estate is very far below the exemption? Even if not required, is it recommended for an estate that is very far below the exemption?

Thanks again everyone for your insights.
bsteiner
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Re: 1041 Estate Income Tax questions

Post by bsteiner »

itsmeagain wrote: Wed Apr 03, 2024 2:30 pm
bsteiner wrote: Wed Apr 03, 2024 1:34 pm
HomeStretch wrote: Wed Apr 03, 2024 12:17 pm ... do Estate Form 1041s have a high percentage of review by the IRS?
They're supposed to look at them when they audit the estate tax return, but that's mainly to make sure that the executor didn't deduct the same administration expenses on both the estate tax return and the fiduciary income tax returns.

Fiduciary income tax returns are filed by fiduciaries, so they're probably going to have fewer errors than returns filed by living taxpayers.
Is filing an estate tax return (actual estate tax, as opposed to estate income tax on form 1041) required when the estate is very far below the exemption? Even if not required, is it recommended for an estate that is very far below the exemption?
...
We almost always file an estate tax return for portability if the decedent was survived by a spouse.

We also file an estate tax return if the estate is close to the filing threshold and would be over the filing threshold if values of assets other than cash and marketable securities were adjusted upward.

We also file an estate tax return if necesary to allocate GST exemption. Some gifts are covered by the annual exclusion for gift tax purposes, but not for the GST exemption, so the available estate tax exclusion could be greater than the amount of GST exemption available. That could also happen with a GRAT or QPRT since the values of those are discounted for gift tax purposes, and since you can't allocate GST exemption until the end of the retained term.

Other than in the above cases, we usually wouldn't.
Topic Author
itsmeagain
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Re: 1041 Estate Income Tax questions

Post by itsmeagain »

Thank you, bsteiner. None of those cases apply to this decedent and his estate.
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