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George Saenz, the Bankrate.com Tax Talk columnistSelling inherited property within an estate

Dear Tax Talk,
My parents passed away and left my brother and I (in the will) a 50-50 split of the home they lived in and two rental properties. It is in the estate right now and we decided to liquidate all properties. The value of the home is $46,000 and the rentals are $75,000.

Do we pay capital gains tax if they are sold under the estate? What if we decided to keep the rentals, the estate gets closed and then we sell them? Would we pay capital gains tax? I'm asking if we should keep them and sell later because the rentals are going to be a slow sale and may hold up the estate closing. Neither of us really wants to be owners of rental properties.
-- Guy

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Dear Guy,
When someone passes away, his or her property usually goes through a probate procedure. During the time that assets are processed through probate, a separate taxable entity similar to a trust is created. This entity needs to apply for a federal employer identification number (Form SS-4) and report and file an annual estate income tax return: Form 1041.

When your parents passed away, the cost basis of the property that passed to the estate trust became its fair market value at the date of death. Hence, if the properties are sold shortly thereafter, there will be little or no gain on the sale. In fact, there is usually a small loss to take into account because of selling expenses, such as real estate commissions and closing costs. So it doesn't matter whether the properties are sold by the estate or distributed to you and shortly thereafter you sell them. Neither you nor the estate will owe capital gains tax.

If you'll have costs associated with transferring the properties to the beneficiaries' names, you may want to take this into account when evaluating offers on the property. For example, there may be stamp taxes and recording fees due that could be avoided if sold by the estate. In addition, the property may be revalued by the county's property appraiser for real estate tax purposes.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: June 14, 2006
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