Q:

Subject: Section 121after death

 

If a parent dies (other spouse had already died a number of years ago) and leaves their primary residence to the children and they sell it 5 months after date of death can they claim the section 121, $250,000 exclusion on the 1041?  The house was in the parent’s living trust when the parent was alive.  Thank you for your help.

A:

This is the exact kind of issue that you must work on with a professional tax advisor.

There  are a number of issues to be resolved.

The Section 121 exclusion will only apply if one of the heirs has been living in the home after receiving title to it.  Even so, I doubt if there will be any gain to even worry about.

With a living (aka revocable) trust, ownership of the decedent’s assets generally transfers immediately to the  beneficiaries (heirs); so I doubt if the property sale would be reported by the estate on a 1041.  That is normally the case for property sales where title hadn’t been changed.

When your parent passed away, the cost basis for the heirs for all of her property is stepped up to its fair market value as of the date of death.   There are also provisions in the tax law to use an alternate date, usually six months later.   If the home is being sold shortly after death, as in your case, there wouldn’t be any gain because the sale price would be the estate value.  In fact, after accounting for selling costs, there is more likely to be a capital loss.

If the gross value of your parent’s estate exceeds the exclusion for the year in which she died, you must file an Estate Tax Return (Form 706) listing everything. This is sometimes even a good idea with smaller estates in order to document values and prevent any future accusations of tax evasion by IRS or the State.  This is a decision that your legal and tax advisors can assist with.

As you can see, there are a lot of details that need to be addressed with the assistance of competent tax and legal advisors.

Good luck.

Kerry Kerstetter

 

From a reader:

Subject: Thank You

Thank You for your site.  You have shown me that being a C Corp may not be as bad as everyone says.  I am using a June 30 FY because of your opinion (and I’m working with a local CPA to keep me straight).

My reply:

I’m glad you found my info useful.  However, it is never to be relied on in lieu of the services of a competent professional tax advisor who can better assess your situation.

You should also keep an open mind in regard to avoiding the all or nothing approach to running a business.  As your company and personal wealth grow, you and your advisor could very easily see the need for another entity in addition to your C corp.

Good luck.

Kerry Kerstetter

 

It’s just too bad that he doesn’t have the guts to do anything as forceful as this; just like his father.

Spidell has posted a copy of the California 2006 income tax rates for individuals.

Understanding the New Tax Rules

Why Reselling a Time Share Can Be Anything but a Vacation – Another reminder of why timeshares are the absolute worst way to invest in real estate.

New Rollover Option for Inherited Accounts – From Gail Buckner

A provision in the most recently enacted tax law tightens up on the condition of used items donated to charity for which a deduction may be claimed.

From QuickFinder’s summary of the new law:

Charitable Donations of Clothing And Household Items. For contributions after the August 17, 2006, no deduction is allowed for contributions of clothing or household goods unless the items are in good used condition or better. This rule does not apply to donations of a single item valued at $500 or more, if a qualified appraisal is included with the return. (Note: The new law does not define “good used condition”.)

From F.R. Duplantier:

USED
For Bill Clinton, it just isn’t fair
That donations be in good repair:
What to do with worn socks,
Dirty hankies and jocks,
And his raggedy old underwear?

Joe Kristan also covered this a few weeks back.