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So this property is part of a trust? The trust has to file and pay taxes, like a business or individual.
That's a lot of money at stake, I would be talking with an experienced estate attorney or CPA.
Yes, it's part of my mother's revocable living trust. From the IRS' point of view it is taxed to her, not the trust unless she passes away. Then the trust becomes irrevocable. Then I have to get a tax number for the trust.
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Originally Posted by jiminnm
Income in respect of a decedent is certainly not new. It's been around as long as estates have taxed. Estates and trusts can, and sometimes do, have income tax liabilities and estate tax liabilities. This is what the IRS says about deductions, income and taxes in respect of decedent: https://www.irs.gov/pub/irs-pdf/p559.pdf
Gains on the sale of property are taxed as a capital gain. If you do the calculations correctly, there is no double taxation. The gains are taxed as income because taxes have never been paid on the gain. If your mother is living when the house is sold, the gains will be taxed in the year of sale. Since this was not her residence, there is no exempted amount.
It's tricky. Here's what I read about the IRD:
IRD is due if the sale is deemed to have occurred before death but the proceeds aren't collected until after death. The governing date according to the escrow company is the last day of the escrow when the deed is recorded. Then a bonafide sale occurs, not when the sales contract is signed--because the buyer always has the right to back out of the deal for a period after the sale contract is signed. At that point I would guess the step-up in basis applies if my mother passes before the last day of escrow.
Only if you accept the inheritance or benefit from the decedent. You can say, "no, thank you".
Again, you are looking as the entirety of the profit of the sale as "yours", when, in fact, there are taxes owed that will be collected later. That "tax portion" of the profit is NOT your inheritance.
Wellllll........I don't know many people other than Warren Buffet who are going to turn down a couple hundred thousand dollars because they owe some tax on it. The idea is to us ordinary folk this kind of thing usually only happens once in a lifetime and for many of us it becomes the only means of financing our retirement. It's kind of a bummer that the government comes after us and bleeds 30-40% off the top to finance their wars.
Anyone ever heard of the IRD (Income in Respect of Decedent) tax???????
I never give the IRS credit for running out of ideas to tax us a different way, but this one really caught me. Whoever said you can't take it with you was probably referring to the heirs as well as the deceased.
Here's the skinny: IRD is income, including income from the sale of a rental property, that is taxed because the Fed feels the person would have paid tax on this income but (s)he had the bad manners to pass away before receiving it. Thus the money would go to his heirs, escaping tax. The IRS cried foul and said basically, "Just because the guy died you don't get the dough tax-free. No, no, no! You gotta pay tax on that money because had the decedent lived HE would have paid tax!" Go figure.
Anyway, I listed my 99 YO mother's rental property while she was well and suddenly she took ill. She might recover or, sadly, she might not. But if she passes while the property is in escrow her heirs could be on the hook to pay this dastardly tax (which tax ISN'T dastardly? ) which could reach 40%!!!
Apparently, from what I can gather, the tax kicks in because she (or I as sole Trustee) listed the property while alive but passed before the sale could be consummated in our scenario. Thus she was expecting the income from that sale (capital gains IS income) and because it is income in respect of death it is liable for the IRD and heirs don't receive the step-up in basis.
Anybody know anything about this tax and is it applicable to our situation?
Well, it's income. It's not part of the estate, since it didn't exist when the person died. It's income that was rec'd later. So someone has to pay income tax on it, whether it's the estate that pays it, or the heirs pay it.
This makes sense to me. Without reading about this IRD, if it were me as the heir who rec'd a check after the fact of death, I would have assumed I'd have to claim it as income. Because it is income received after the death.
Are you already listed as the owner of the property, or you were the owner in the contract of sale? Whoever OWNED the property when the rent payment was made, would owe the income tax on it, it would have seemed to me.
Well, it's income. It's not part of the estate, since it didn't exist when the person died. It's income that was rec'd later. So someone has to pay income tax on it, whether it's the estate that pays it, or the heirs pay it.
This makes sense to me. Without reading about this IRD, if it were me as the heir who rec'd a check after the fact of death, I would have assumed I'd have to claim it as income. Because it is income received after the death.
Are you already listed as the owner of the property, or you were the owner in the contract of sale? Whoever OWNED the property when the rent payment was made, would owe the income tax on it, it would have seemed to me.
Being part of the estate is good news, as every person gets an $11.2 million exemption for their estate in 2019. So her estate wouldn't owe any tax on it. I'm not listed as the owner because she is still alive. But things are looking up, 99 YO and she's recovering. She's tough.
Actually might not want the sale to occur prior to her death - she will pay tax on difference between the cost of house ($16K) and sale price ($725K) - $250K personal exemption means she would pay tax on approx. $459K gain as ordinary income which would put her in the 35% tax bracket and could touch the 37% bracket. This $459k could be reduced by the death of her spouse which could step up the cost basis significantly. At her death, you would inherit the stepped up basis with no tax consequences as long as estate is less than $11M and could immediately sell with zero tax on the gain.
Don't sell things soon before you die, whether on a contract or outright. IRD is actually just applying regular income tax as if the person lived so its not an extra tax. Its the denial of a tax break for dying.
Still, it can sting the unaware but at least there are such things as DRD to offset them.
The property, unfortunately IS under contract and I would be on the hook for the commission. It's a "which is the greater evil" situation. But as I read it the tax actually could be subject to double taxation, though one tax would be cancelled out by the $11 million estate exemption. The big question is whether the tax jumps from the 20% capital gain tax to 40% tax on ordinary income. The basis is $16K and the sale will be in the $725K neighborhood. But my mother will need the income if she pulls through. They got ya coming and going.
So you are annoyed that taxes will have to be paid on $709,000 before you get your cut? But it's all "free money" for you, isn't it, since you didn't actually do anything to earn it? (I'm not being snarky -- that's a real question.)
I hope your mother pulls through and spends it all before she dies ... *
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* Yeah, that line WAS kind of snarky, but it's because I can't understand people whining about having to pay taxes on literally hundreds of thousands of dollars that they did not do anything to actually, you know, EARN, other than be born.
Seriously you need to get someone that has a clue about estate tax right now. You have everything backwards. The worst thing that could happen is that she dies AFTER you sell it, not before. If she dies before, the asset gets a step up in basis and there is effectively no tax on the sale. If she dies a day after the sale her estate is on the hook for the cap gains tax.
Well, it's income. It's not part of the estate, since it didn't exist when the person died. It's income that was rec'd later. So someone has to pay income tax on it, whether it's the estate that pays it, or the heirs pay it.
This makes sense to me. Without reading about this IRD, if it were me as the heir who rec'd a check after the fact of death, I would have assumed I'd have to claim it as income. Because it is income received after the death.
Are you already listed as the owner of the property, or you were the owner in the contract of sale? Whoever OWNED the property when the rent payment was made, would owe the income tax on it, it would have seemed to me.
If the sale occurs before death but income is not received until after death then the IRD is due then it's a normal inheritance and receives the step-up in basis. No taxes are due. I am not the owner of record but I listed the property under my power as trustee using a straw man.
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Originally Posted by karen_in_nh_2012
So you are annoyed that taxes will have to be paid on $709,000 before you get your cut? But it's all "free money" for you, isn't it, since you didn't actually do anything to earn it? (I'm not being snarky -- that's a real question.)
I hope your mother pulls through and spends it all before she dies ... *
=========
* Yeah, that line WAS kind of snarky, but it's because I can't understand people whining about having to pay taxes on literally hundreds of thousands of dollars that they did not do anything to actually, you know, EARN, other than be born.
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So you are annoyed that taxes will have to be paid on $709,000 before you get your cut?
You're damn right I'm annoyed. Wouldn't you be??????
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But it's all "free money" for you, isn't it, since you didn't actually do anything to earn it?
I managed the property for 10 years and put up with all those headaches a rental property brings so the money isn't "free".
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I hope your mother pulls through and spends it all before she dies ... *
I hope so too. But things are taking a turn for the worse. She's not eating or drinking and is so weak the ALF called me and asked me to move her to a different facility.
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But if she passes while the property is in escrow her heirs could be on the hook to pay this dastardly tax (which tax ISN'T dastardly? 
But things are taking a turn for the worse. She's not eating or drinking and is so weak the ALF called me and asked me to move her to a different facility.
