I intend to take this situation to a tax professional ASAP, but I have a feeling I won’t get an appointment until after the 15th, and this question – which just occurred to me – has got me worried. I’m hoping you Dopers can give me some insights in the meantime. I realize you are not my lawyer, CPA, or tax professional.
This all takes place in New York State. I am the executor of my late mom’s estate. She died several years ago. My mom’s will specified that her house was to be sold and the proceeds split three ways to her 3 children. I sold the house in May 2012. I have not gotten around to distributing the money yet; it has been sitting in a non-interest-bearing estate account ever since.
Will there be any tax liability to the estate for 2012 because the sale proceeds were not distributed before the end of 2012? In other words, will the estate take a big tax hit because there was “income” but no offsetting “outgo” in 2012? Was it a bad move to not make distributions ASAP?
I am not a lawyer in New York, so,I cant say for certain, but I very much doubt that you will have any problems. This happens all the time and the sale of the house should not incur tax, nor should the somewhat tardy distribution to the heirs.
Since several years passed between your mom’s death and the sale of the house, it is indeed possible that the estate realized some income as a result of the sale. (Or a loss for that matter, too.) Typically, when assets are sold promptly after the date of death, there is little chance that the value of the assets will change substantially between the date of death and the date of sale. But when you wait a number of years, who knows? I also don’t know what other assets (besides the house) the estate might have which also may be generating income.
In any case, an estate is required to file an income tax return (Form 1041) in any year when it has gross income exceeding $600 (although that does not necessarily mean it owes any income tax).
If you cannot consult with a tax professional before the filing deadline, I suggest that just to cover your behind you request an automatic extension to file 1041. You request this extension by filing Form 7004 by April 15. (Form 7004 Instructions.)
For some reason, people are terrified to file extensions. It costs nothing to file and let me assure you that the IRS won’t “get mad” at you for filing. If it turns out to have been unnecessary, no harm done. On the other hand, it may (or may not) save you some penalties and may prevent you from losing some elections that can only be made on a timely-filed return.
As others have said, you may have a gain on the sale of the house. Regardless, Form 1041 should be filed. The gain would be figured by taking the gross sales price and reducing it by the adjusted cost basis of the house, which would be the fair market value of the house on the date of her death, and reducing it by any expenses of the sale such as commissions.
One issue you may have is that usually the gain/loss from the sale and any other income/expense items would be reported on K-1’s on the 1041 and picked up by each beneficiary on their 1040 return according to their share. Since the money from the sale has not been distributed yet, depending on the language in the will and New York state laws with which i am not familiar, the estate may be able to pay any applicable tax thru the 1041 return instead of distributing out the income/loss to the beneficiaries. Long-term capital gain rates still apply to fiduciary returns.
From what I gather from what’s been posted, the bottom line is essentially that the proceeds from the house sale does not count as taxable income if the sale price was the same or less than the market value of the house at the time of my mom’s death (which it was).
You may not have a gain on the sale, but I would still recommend filing a 1041 return even if the estate had no other income. Usually you would receive a 1099-S reporting the proceeds of the sale, which also gets filed with the IRS as well. The IRS has no idea if there is a gain or not and will expect a return showing the sale. Even if a 1099-S was not filed, I would still file the return to be on the safe side.