Discussion:Necessity of filing a 1041

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Discussion Forum Index --> Tax Questions --> Necessity of filing a 1041


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Marilyn (talk|edits) said:

31 January 2006

My client is the fiduciary for her brother's estate. The only transaction has been the sale of his personal residence from the estate. The estate has received a 1099R. Is it necessary to file a 1041 in this circumstance? There would be no profit, but the definition I see for filing is $600 in gross income.

Riley2 (talk|edits) said:

31 January 2006
Gross income, in this case, is zero since the gross profit from the sale of the residence is zero.

WESR (talk|edits) said:

2 February 2006
hi sorry but you have missed a big tax deduction here. if the inherited home was not used for personal purposes you can take a long term capital loss for the selling costs and split this among the benes. this is because the home can be held for investment purposes by the benes. your cost basis is fmv on date of death or the gross selling cost if say within a year of death. the ltcl would be all the closing costs. this is overlooked almost all the time and you will come out looking like a hero. dont forget to value bill for the estate fiduciary return. plus you can deduct all the estate legal fees if no 706 was filed as additional capital loss if for the sale or as excess deductions on termination. .bye

Msmith7305 (talk|edits) said:

3 February 2006
I disagree with the above responses to a point. The $ 600 requirement is GROSS income, not net profit. IRS has no idea of the cost of anything. If gross sale is $ 600 or more, you need to file. Think about if the estate had sold $ 200,000 in stock. I'm sure the IRS would be interested in that even though the cost basis might be $ 201,000.

I also don't agree with the cost being its sale price within a year of death, either. You have to look at the facts. It MIGHT be the same as at time of death, it might not be. Was a 706 filed? Was the will probated? If so, a fmv was probably stated in the probate inventory. If a 706 was filed, a fmv was definitely stated.

Riley cites Sec. 61(a)(3), Reg. Sec. 1.61-6, Reg. Sec. 1.641(a)(2), and SCA 200018051

Riley2 (talk|edits) said:

3 February 2006
Fortunately, we don’t need to guess at the definition of gross income. The statutes and regulations are very clear on this issue. Gross income from the sale of property includes only the gross proceeds that are in excess of basis. See Sec. 61(a)(3), Reg. Sec. 1.61-6, Reg. Sec. 1.641(a)(2), and SCA 200018051.

Msmith7305 (talk|edits) said:

3 February 2006
If you will look at the 1041 instructions it will tell you "$ 600 of gross income...(regardless of taxable income)". You can go on all you want in terms of Sec 61. I know this, if I'm faced with receiving a 1099-S for $ 600 or more from the sale of property, I'm filing regardless of my cost basis.

Riley2 (talk|edits) said:

3 February 2006
Sorry, even the Internal Revenue Service disagrees with you.

In SCA 200018051, the Service ruled that a taxpayer isn't required to file an income tax return if the gain from sale of property is less than gross income threshold for filing income tax return regardless of amount of proceeds that are reported on Form 1099-B, provided that gross income of taxpayer doesn't otherwise exceed filing requirements. This ruling was based on Reg. § 1.161-6 which defines gross income in terms of the "net gain from the sale".

Thus, this alleviates the filing requirement for children and elderly taxpayers who may have 1099-B’s totaling several thousand dollars, but have overall losses on the sales.

WESR (talk|edits) said:

3 February 2006
hi guys has everyone missed my point? if you sell a home for $300k with at least a 5% real estate commission you have a $15k capital loss plus other closing costs to split with the benes. doesnt that pay for a tax return? file regardless what the gross income test is.

Warren (talk|edits) said:

3 February 2006
I haven't missed you point WESR. I would file the return and take the loss.

Riley2 (talk|edits) said:

3 February 2006
Assuming that Marilyn's client did in fact realize a $15,000 loss, then, yes I would file the return.


Klesher (talk|edits) said:

28 February 2006
Do I understand this correctly - decedent dies - his personal residence go to the estate - the estate sells - the loss can be taken, even though it was decedents personal residence?

Linda - mark the box final and it will flow to K-1's

Klesher (talk|edits) said:

1 March 2006
How about the utilities and upkeep of the house when it was in estate and sat empty? An expense of estate?

Sw (talk|edits) said:

20 March 2006
I am also trying to help a client with a 1041 for her uncle's estate. So if I am understanding correctly, we will show a loss of his home,after comm. and legal fees since no 706 was filed. He died in Dec 04 and house sold Apr 05. But what about stocks that where owed at death will they also be value at the date of death and gain or loss base on the differents. I usually don't to 1041's just trying to help someone out. Thanks

Dhtax (talk|edits) said:

20 March 2006
Riley2 is probably right (as usual) that no filing is required when the TP has a net loss on sale of property (and no other income that would require filing). But that doesn't mean they should not file. I've had a half dozen clients in the past few years who have come to me in a panic because they recieved IRS demands for large amounts (including penalties and interest) based on the gross proceeds reported to the IRS on 1099-Bs. In some cases the 1099s were 5-6 years old and it was very hard to reconstruct basis info. None of them ended up owning anything, but considering what they had to pay me it would have been a lot cheaper for them to have filed in the first place.

Dennis (talk|edits) said:

20 March 2006
There is a running question about where to report sale of decedent's personal residence. Technically it only gets reported on the 1041 if the sale is necessary to effect distribution or pay claims against the estate. If the will treats the property as a specific bequest or there is only one beneficiary the sale should be reported on 1040. A loss on the sale of a personal residence is not allowed under 641, however making it available for sale within a short period of time changes nature to investment.

If the stocks were sold by the estate, report on 1041 D. Inherited property is always long term. Date of death value vs sales price for gain or loss. 642(g) election required for expenses that can either be deducted on 706 or 1041. http://www.irs.treas.gov/pub/irs-sca/1998-012.pdf

HPTAX (talk|edits) said:

20 March 2006
(I need a break so, I'm going to have some fun with this one.) The last responses have gone to the more basic aspects of fiduciary accounting. So here's my basic explanation. A 1041 is a business return. The business is capitalized at the date of death or transfer in the case of a trust (the funds no longer belong to the donor). There is a manager(fiduciary) - the executor\trustee. The fiduciary is responsible collecting and maintaining the business assets, according to terms of the trust or will, for the benefit of the partners (beneficiaries). So yes, you need to pay the heating bill so the pipes don't freeze. The business can have taxable events. If it sells assets, gains and losses are reportable. The income of business can be passed through to the partners (beneficiaries) via K1's. (There are specific rules as mentioned above.) Once the assets are distributed, the business is terminated and the final 1041 is filed.


RLMCPA (talk|edits) said:

26 February 2008
I just want to add to this discussion that although these rules apply NOW, WATCH OUT for sales after 2009 when every thing changes unless Congress acts:

For estates of decedents dying after 2009, the $250,000 gain exclusion on the sale of a decedent's personal residence will apply to sales made by the decedent's estate, a trust which immediately before death was a qualified revocable trust [as defined under IRC Sec. 645(b)(1) ] or any individual who inherited the property [IRC Sec. 121(d)(11) ].

My guess is that the rule regarding no capital loss on the sale of personal property will also be applied when this rules takes effect. Good news when gain is the result, bad news when losses result.

RLMCPA (talk|edits) said:

26 February 2008
Finally, you should note that the IRS does not agree with the losses on a personal residence of the decedent. See Chief Counsel memo SCA 1998-012. However, I think there is good case law supporting this position. See Miller, Watkins, Campbell, & Carnrick cases.

Kevinh5 (talk|edits) said:

26 February 2008
there are several threads with the links to the SCA RLM mentions. if you do a search on "SCA 1998-012" I'd bet you could find them.

Dennis (talk|edits) said:

26 February 2008
There is nothing in the memorandum that says the IRS disagrees with the loss position. The Brookhaven study merely pointed out that the majority do the 1041 wrong.


Ann54 (talk|edits) said:

27 October 2009
This is probably a repeat of some of the above. The estate sells a pers. residence & a commerial property. Can the following types of expenses be included w/ selling expenses such as the RE commission to determine the gain/loss? Appraisal, utilities to maintain the prop. while it is for sale, property clean up costs, insurance, travel by the fiduciary to market &then close the deal?

My CPA friend says not to use these..wouldn't make it through an audit. What about some state lodging taxes accrued by business (a bed & breakfast) that were not paid unitl after the death.

Dennis (talk|edits) said:

28 October 2009
The cost of the appraisal would be an administration expense deductible on a 1041 by election. Everything else is also deductible, however where depends on state law and document language. One important question, among others, would be does the property have to be sold to effect distribution.

LMR (talk|edits) said:

26 February 2010
Dennis,

Can you provide the code section or regulation for using the sale price for gain or loss vs the date of death fmv for inherited property that is being represented as investment property per Form 1041?

Dennis (talk|edits) said:

27 February 2010
Whoa. You are talking about a situation where every transaction is unique and you're looking for Code specifics?

Basic Guidelines: An appraisal is a guess, a sale is presumed to be fact. The closer the date of sale to date of death the more likely it is that the sale price would have greater validity. Nine months is the generally accepted cutoff for sales price always, but it's not ironclad. Any time there is a discrepancy between appraisal and sale you, as the preparer, have the responsibility to know why. (Is the difference consistent with the local decline (or increase) in the real estate market? Was the property rezoned? Did they strike oil?)

LMR (talk|edits) said:

3 March 2010
Well in this situation - no appraisal was performed on the date of death. However one was performed a few days before the house sold (10 mths later). However the appraisal was approx $10k higher than the sale price. Based on the appraisal, the comparable house sales sold fairly close to the actual sale price of this home. Based on that, I made a judgement that the appraisal fmv was not reflective of the loss in the market. Therefore in being conservative and looking at the drop in the market value in this area for 2009 - I went with the most conservative - the gross sale price (fmv=what a willing buyer is willing to pay) vs. the appraised value. I am sure the value on the date of death value was higher but since there was no documentation - I took the most conservative approach. But was also following these discussions and noticed the mention the to "gross sale price" vs date of death value. Just wanted more support for going with the sale price vs DOD value. Thanks.

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