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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121150  
Subject: Capital gains tax for an estate? Date: 7/5/2012 2:40 PM
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My mother died 4 years ago. We're finally selling her house in Texas, which is worth quite a bit more than when she died and one heck of a lot more than when she and my dad bought it. The house is still part of the estate, which has not yet been closed.

How is this profit handled? Does the estate, with no income, pay capital gains tax? Does it pay tax on the profit from date of purchase or profit from date of death? Or do the heirs pay tax on the profit from date of death?

I've done some searching on Google, but have found too many possibilities and no answers.

Thank you.

Karen
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116399 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/5/2012 10:37 PM
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My mother died 4 years ago. We're finally selling her house in Texas, which is worth quite a bit more than when she died and one heck of a lot more than when she and my dad bought it. The house is still part of the estate, which has not yet been closed.

There's way too much missing from the post. For example, what's been going on for 4 years? How was title held? What returns has the estate filed? What did the will provide? What does the estate's lawyer say? What does the estate's accountant say?

Phil
Rule Your Retirement Home Fool

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116400 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/5/2012 11:35 PM
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My mother died 4 years ago. We're finally selling her house in Texas, which is worth quite a bit more than when she died and one heck of a lot more than when she and my dad bought it. The house is still part of the estate, which has not yet been closed.

Phil's questions in an earlier post are pertinent, but I take it from this info. that the house was titled in your mother's own name, and that's why it's in the probate estate.

How is this profit handled?

It is reported on Form 1041, Schedule D

Does the estate, with no income, pay capital gains tax?

Yes, if that's the only income item, AND the gain is not considered distributed/distributable to the beneficiaries (which it would be, on the estate's final return.)

Does it pay tax on the profit from date of purchase or profit from date of death?

Generally, from the date of death. The estate, like an individual heir, gets a basis equal to the date-of-death value.

Or do the heirs pay tax on the profit from date of death?

They will, if it is the final return of the estate OR if distributions are made, which serves to carry the gain out as taxable to them. Distributions of income, including capital gains, are reported to each beneficiary on a K-1 schedule.

Bill

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116403 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 11:50 AM
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My mother died 4 years ago. We're finally selling her house in Texas, which is worth quite a bit more than when she died and one heck of a lot more than when she and my dad bought it. The house is still part of the estate, which has not yet been closed.

Phil's questions in an earlier post are pertinent, but I take it from this info. that the house was titled in your mother's own name, and that's why it's in the probate estate.

How is this profit handled?

It is reported on Form 1041, Schedule D

Does the estate, with no income, pay capital gains tax?

Yes, if that's the only income item, AND the gain is not considered distributed/distributable to the beneficiaries (which it would be, on the estate's final return.)

Does it pay tax on the profit from date of purchase or profit from date of death?

Generally, from the date of death. The estate, like an individual heir, gets a basis equal to the date-of-death value.

Or do the heirs pay tax on the profit from date of death?

They will, if it is the final return of the estate OR if distributions are made, which serves to carry the gain out as taxable to them. Distributions of income, including capital gains, are reported to each beneficiary on a K-1 schedule.

Bill
_____________________________________

Yes, the house is still in my mom's name. The estate has filed tax returns each year and paid property taxes. After closing, the final tax return will be filed and the assets distributed. Per the will, the assets will be equally distributed to the heirs.

In this case, as the next return will probably be the final return, the estate won't pay capital gains tax but the heirs will? Surely the estate and the heirs wouldn't both pay capital gains tax on the same asset?

Thank you.

Karen

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116404 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 12:40 PM
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Yes, the house is still in my mom's name. The estate has filed tax returns each year and paid property taxes. After closing, the final tax return will be filed and the assets distributed. Per the will, the assets will be equally distributed to the heirs.

In this case, as the next return will probably be the final return, the estate won't pay capital gains tax but the heirs will? Surely the estate and the heirs wouldn't both pay capital gains tax on the same asset?

Thank you.

Karen

================================
Correct. The estate gets a deduction for the distributed/distributable amounts.

Bill

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116405 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 1:04 PM
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Correct. The estate gets a deduction for the distributed/distributable amounts.

Bill


Thank you very much.

I've also seen different information on what percentage we (the heirs) will pay on the profit. One source said 15% if the taxpayer's income was $35k or less and 25% if it was higher. And other sources said other things.

Do you know? I've been trying to get the executor to find out, but he's in no hurry. He's one of the heirs.

Karen

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116406 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 2:56 PM
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Yes, the house is still in my mom's name. The estate has filed tax returns each year and paid property taxes. After closing, the final tax return will be filed and the assets distributed. Per the will, the assets will be equally distributed to the heirs.

In this case, as the next return will probably be the final return, the estate won't pay capital gains tax but the heirs will? Surely the estate and the heirs wouldn't both pay capital gains tax on the same asset?


If you haven't been using an accountant for the 1041's you definitely want to use one for the final return. You want to consult with the attorney and accountant before you make your distribution. There may be quirks in state law that affect how you proceed and how you report. In addition, there may be excess expense deductions that can flow to the heirs' returns.

Phil
Rule Your Retirement Home Fool

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116407 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 3:03 PM
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I've also seen different information on what percentage we (the heirs) will pay on the profit. One source said 15% if the taxpayer's income was $35k or less and 25% if it was higher.

If
the gain flows through to the heirs' 1040's in 2012 it will be taxed at 0% (15% bracket and below) or 15% (all others). As of today, 2013 LTCG are taxed at 10% and 25% respectively, except for the "super" LTCG (greater than 5 year holding period), which are, I beleive, 8% and 18%.

Phil
Rule Your Retirement Home Fool

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116408 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 5:27 PM
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As of today, 2013 LTCG are taxed at 10% and 25% respectively, except for the "super" LTCG (greater than 5 year holding period), which are, I beleive, 8% and 18%.

Won't that be 20%, not 25%?

Ira

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116409 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/6/2012 6:48 PM
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Won't that be 20%, not 25%?

@%#$ keyboard!

Yes, thanks for the catch.

Phil
Rule Your Retirement Home Fool

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116410 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/8/2012 5:47 PM
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Hmmm.

I'm self-employed. Is it legal for me to have my agent hold back payments until next year?


Karen

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116411 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/8/2012 6:11 PM
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I'm self-employed. Is it legal for me to have my agent hold back payments until next year?

Of course it is. Income is still taxable in the year you had constructive control of it, though.

Phil
Rule Your Retirement Home Fool

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116412 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/8/2012 7:33 PM
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I'm self-employed. Is it legal for me to have my agent hold back payments until next year?
====================
Of course it is. Income is still taxable in the year you had constructive control of it, though.

Phil
Rule Your Retirement Home Fool

====================
Phil's right. But it's also true that tax rates will go up next year for a lot of people, if the "Bush era tax cuts" expire, as they are scheduled to do, in the absence of congressional action.

So think carefully about the ramifications of deferring income to next year. It might not be a good year to do it.

Bill

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116413 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 10:48 AM
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I'm self-employed. Is it legal for me to have my agent hold back payments until next year?
====================
Of course it is. Income is still taxable in the year you had constructive control of it, though.

Phil
Rule Your Retirement Home Fool
====================
Phil's right. But it's also true that tax rates will go up next year for a lot of people, if the "Bush era tax cuts" expire, as they are scheduled to do, in the absence of congressional action.

So think carefully about the ramifications of deferring income to next year. It might not be a good year to do it.

Bill


I'm a little confused by the answers.

My reason for concern: if I earn enough to bump me above the 15% tax bracket, the 15% tax on the house profit will almost certainly wipe out the extra money and then some. I doubt the Bush tax cuts did much for me, so I'm not worried about the effect of their expiration.

If I earn it this year, but have payment deferred until next year, does that mean I have constructive control of it? If that's true, then I wouldn't have the option of deferring it anyway?

Karen

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116414 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 11:16 AM
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If I earn it this year, but have payment deferred until next year, does that mean I have constructive control of it?

Yes.

If that's true, then I wouldn't have the option of deferring it anyway?

You can defer actual payment, but not income recognition for tax purposes.

I have no idea of how you handle your accounts, but I'll make up an example of what I'm talking about.

Your usual practice is to bill upon completion of a project with payment due upon receipt and considered timely if paid within 30 days. You complete a job on August 1, 2012 and another on December 29, 2012. You bill both of them on December 30, 2012. It's clear that the only reason you delayed billing the earlier project was to delay receipt of the income.

Phil
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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116415 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 11:52 AM
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Your usual practice is to bill upon completion of a project with payment due upon receipt and considered timely if paid within 30 days. You complete a job on August 1, 2012 and another on December 29, 2012. You bill both of them on December 30, 2012. It's clear that the only reason you delayed billing the earlier project was to delay receipt of the income.

Phil
Rule Your Retirement Home Fool


So, what you're saying is that I need to sit down with TurboTax and get an idea of my income limit for the year, then meet with a CPA to come up with an actual plan?

Because darned if I want to work hard to get my income up only to pay income taxes on the extra and capital gains tax on the house profit, leaving me with less money that if I had cut back on the work I accepted.

TurboTax will help me figure out how much money I can put away in retirement accounts. I have an SEP IRA and I think I can contribute to something else, too? But would the something else be tax-deferred? I'm almost 63, so I can contribute catch-up amounts where applicable. Too bad I can't go back and contribute more money for last year.

Thank you, Phil and Bill. Your assistance and information in enormously helpful.

Karen

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116416 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 1:52 PM
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My reason for concern: if I earn enough to bump me above the 15% tax bracket, the 15% tax on the house profit will almost certainly wipe out the extra money and then some.

The profit on the house can also push you through the 15% bracket.

To the extent the capital gain would be in the 15% bracket, the tax on that gain is 0. If your other income puts you in the 15% bracket AND you have a large capital gain, only part of the gain is going to be tax free. For a large gain, any part of the gain that puts you over the 15% bracket is going to be taxed.

And don't forget that the gain is still part of your AGI. So anything that is AGI-sensitive (like the medical deduction or the $25k allowance for rental losses or the taxable portion of Social Security benefits) will be affected by the gain.

The calculation is a bit tough to explain, but if you follow through the worksheets for schedule D, you'll get the right results. I'd suggest doing some actual projections with estimated numbers to get a feel for what the tax will be on your capital gain.

--Peter

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116417 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 1:57 PM
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So, what you're saying is that I need to sit down with TurboTax and get an idea of my income limit for the year, then meet with a CPA to come up with an actual plan?

Because darned if I want to work hard to get my income up only to pay income taxes on the extra and capital gains tax on the house profit, leaving me with less money that if I had cut back on the work I accepted.


There's something wrong in your logic here. Even if you find yourself above the 15% limit, you will only pay 25% on the excess taxable income above the limit, not on all your income. Additionally, you will pay capital gains tax (0% or 15%) only on your share of the gain from the sale of the house, not on the amount of cash distributed to you.

While you might be able to pay less tax over the two years combined by altering the timing of your income, it is exceedingly rare to find a set of circumstances where you will end up with less money in your pocket because you have more income. This isn't one of them.

Ira

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116418 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 2:44 PM
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The profit on the house can also push you through the 15% bracket.

Ah. I was not counting the profit on the house as income. Don't ask me why, but I wasn't. And yes, the profit definitely pushes me through the 15% bracket.

On the bright side:
1. I don't have to try to calculate exactly how much I can earn.
2. I don't have to turn down work I would like to do.
3. In the effort to calculate how much I had already earned, I cleared up 2 serious errors in my records.

Thank you all very much.

Karen

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Author: karenlj Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116419 of 121150
Subject: Re: Capital gains tax for an estate? Date: 7/9/2012 2:53 PM
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There's something wrong in your logic here.


Oh, boy. I was just not thinking that the profit on the house had to be counted as income. And please don't ask me why not--I just wasn't.

<sigh>

Thank you very much.

Karen

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