Dear Tax Talk,
My husband and I are selling the house we have been living in for the past 25 years, which belonged to his parents who have both passed away. There was no mortgage on the house. We maintained the property and paid taxes on it all this time. The house was never transferred out of his parents’ names.
My husband has five siblings, one of whom passed away two years ago. The fair market value at time of his parents’ death was approximately $100,000, and the value now is about $300,000. My question is how and where to report the approximate $200,000 in capital gain. Does this gain get reported on an estate return, or does it get equally reported on each of the six beneficiaries’ tax returns? Also, how does the deceased brother’s share get reported, which will go to his wife and children? What would their basis be?
I’m guessing your husband’s parents died long ago, and that is why you have $200,000 in capital gain on the sale. I’m guessing that in order to sell the home, you’ll have to open a probate proceeding. This will allow you to get the home transferred to an entity such as your parent’s estate so that you can sell it. This transfer won’t affect the value, as that is based on their date of death.
Once you have the estate open, you should apply for a tax ID number on Form SS-4 and also file Form 56 with IRS to establish who will be the personal representative of the estate. You may be able to apply online for the ID number; otherwise, submit it to IRS manually.
The sale of the home would be reported on Form 1041, and each beneficiary would be given a Schedule K-1 to report their share of the capital gain.
With respect to the brother’s death, the right of his heirs to inherit if not decided on morality may be a question decided in probate under your state’s laws. With respect to his basis, it’s questionable if his death would have an impact on his basis in the house. Although he might have had an indirect interest in the house when he died, the fact that there was no estate at the time might mitigate a step-up. Since we have some pundits that read my articles, if I get any opinions on the subject, I’ll let you know.
Ask the adviser
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.