Discussion:Estate Tax distribution
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| Revision as of 10:46, 24 October 2009 KathiJud (Talk | contribs) (Would the sale g) ← Previous diff |
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| {{ForumReplyPost|UserID=KathiJud|Date=24 October 2009|Text=Would the sale go on the 1040 or the 1041? This is a situation I have never heard of before.}} | {{ForumReplyPost|UserID=KathiJud|Date=24 October 2009|Text=Would the sale go on the 1040 or the 1041? This is a situation I have never heard of before.}} | ||
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| + | {{ForumReplyPost|UserID=Dennis|Date=24 October 2009|Text=Assuming the taxpayer files on a cash basis, he who receives reports...♫ Nature of the income remains the same. }} | ||
Revision as of 21:20, 24 October 2009
Discussion Forum Index --> Advanced Tax Questions --> Estate Tax distribution
Discussion Forum Index --> Tax Questions --> Estate Tax distribution
| 22 October 2009 | |
| A new client came with a concern. He is an executor of his wife's mother's estate. The mother had 95,000.00 in face value of EE bonds. The intitial purchase was for 55,000.00. Two other beneficiaries wanted a distribution before the estate was settled. Client went ahead and cashed in all of the bonds.
He included the 40,000 interest on the 1041. He's not sure he was correct in doing this. I'm new in the estate tax arena and right now just want to point him in the right direction. He is also of the opinion that there is no gain on the sale of this mother's home due to the exemption granted to for the sale of personal residence. In my reading it appears a capital gain is due. | |
| 22 October 2009 | |
| See Pub 559
The residence comes into the Estate at its fair market value. Gains over the years since purchase are not subject to income tax. Losses over the years since purchase are not tax deductible. If the residence is sold without being used by a beneficiary, or you have converted to a rental, you can have a gain or loss on sale. FMV compared to sale price net of closing costs. If used by a beneficiary rent free then you can have gain but not loss. You can elect to include the interest on the EE bonds from date of purchase to date of death on the final 1040. Interest from date of death forward goes on the 1041. This can save tax money in some instances so check all the tax brackets etc. Without that election, you put all the interest on the bonds on the 1041. Your beneficiaries may be taxable on their distribution. Read the will to see if they received a pecuniary bequest or a share of the estate's income. | |
| 22 October 2009 | |
| I forgot to say the exclusion of gain on sale of a personal residence is only available to a living person who meets its residency rules. The exclusion of the gain when it passed to the Estate is called the "Step Up" in value. | |
| 22 October 2009 | |
| Thanks Kathi. Which will cause a tax liability, the pecuniary interest or a share of the estate's income? | |
| 22 October 2009 | |
| Pecuniary bequests are not considered to include a share of the estate's income. You do not issue a K-1 since the beneficiary has no taxable amount to report.
Those who receive shares of income do get K-1 forms to report on their personal returns. Income not paid out by the estate? The estate itself pays the tax. This is not a pass through entity like a partnership. Read the document! | |
Walking Spanish (talk|edits) said: | 22 October 2009 |
| As Kathi noted, the election to accrue Series E bond interest (Sec 454) is a good postmortem planning device that is often overlooked. However, I believe the election must be made by the 1040 due date, including extensions, so if Mom died prior to 2009, you are out of luck. | |
| 22 October 2009 | |
| Oh dear. More research, Kathi. There are circumstances in which the §121 exclusion is available to an estate. | |
| 23 October 2009 | |
| Why would an estate need the 121 exclusion since it already has a step up to prevent gain recognition?
I know there are some situations where thankfully a trust can use the 121 exclusion. Trusts use gift rules and don't receive a step up. | |
| 23 October 2009 | |
| Why? Because there is no step up for income in respect of a decedent. Suppose the guy sells his house and runs his car into a telephone pole on the way to the closing...♫ | |
| 23 October 2009 | |
| I don't understand. Capital gain on an asset is not IRD. | |
| 23 October 2009 | |
| Kathi, he's talking about the situation where the sales contract has been signed but the closing hasn't happened - the administrator just performs the clerical function of signing the deed at closing. | |
| 24 October 2009 | |
| So if our TP died in between those two steps - what? Some kind of neverland where its not clearly a 121 exclusion on the final 1040 or a step up preventing gain recognition on the initial 1041? | |
| 24 October 2009 | |
| Agree with Dennnis. Capital gain on a sale that was substantially completed prior to death is IRD and would not be subject to step-up. However, the Sec. 121 exclusion would be available. | |
| 24 October 2009 | |
| Would the sale go on the 1040 or the 1041? This is a situation I have never heard of before. | |
| 24 October 2009 | |
| Assuming the taxpayer files on a cash basis, he who receives reports...♫ Nature of the income remains the same. | |
